Euro drops as economic activity in EZ hits four year low
Fawad Razaqzada November 23, 2018 12:31 PM
The euro was trading weaker on the back of today’s publication of softer-than-expected Eurozone purchasing managers’ indices (PMIs) data, underscoring concerns over growth in the single currency bloc. The PMI data suggested that business activity in the single currency block grew at its weakest in nearly four years in November. But the euro’s losses were contained – for the time being – as the European Central Bank continues to insist that weakness in Eurozone data is only temporary and that it should go ahead with its plans to withdraw crisis-era stimulus measures next year. Any change in that tone, however, and the single currency could drop sharply.
PMIs suggest manufacturing and services barely grew in November
The manufacturing and services sector PMIs from the Eurozone as a whole and for its two largest economies – Germany and France – weakened further, suggesting that the economic slowdown extended into November. The French manufacturing PMI fell to 50.7 from 51.2, down for the second straight month, while the German PMI eased to 51.6 from 52.2 previously. Eurozone manufacturing PMI slumped to 51.5 from 52.0 in October. The Eurozone services PMI hit 53.1 down from 53.7 in October. According to the IHS Markit Flash Eurozone PMI report, “lower order book growth and falling exports were accompanied by deteriorating optimism about the outlook, as well as rising costs and prices.”
Trade wars, EM currency crisis hit demand
It is becoming obvious that part of the reason for weakness in the euro area is due to falling exports to places such as China and Turkey. Without a doubt, the ongoing US-China trade war has had a big impact on Chinese demand as the yuan weakened, while the lira’s repeated falls to record low levels during the summer at the height of the emerging market currency crisis means that Turkish individuals and businesses have also seen import costs soar. In addition to trade factors, it is likely that demand for German and French cars have been hit in the wake of new emissions regulations that have disrupted delivery schedules.
Pressure grows on EUR/JPY
Concerns over growth have also weighed heavily on equities, which in turn has boosted the appeal of the safe haven Japanese yen. As a result, the EUR/JPY has struggled to sustain any meaningful rally over the past two months or so. With the EUR/JPY printing lower lows and lower highs on its short term charts, the technicals aren’t looking too great. Indeed, the EUR/JPY is currently residing below its 21-, 50- and 200-day moving averages. What’s more, these averages have negative slopes, objectively confirming the downward trend. Thus, a potential breakdown from the converging trend lines appears likely next week. At the time of writing, the EUR/JPY was bouncing off today’s earlier lows, and back above the 128.00 support level.
While the technical outlook for the EUR/JPY doesn’t look too great at the moment, things can change quickly – say, in the event of a stock market rebound. But we would drop our bearish view on the EUR/JPY only if it makes a higher high, or as a minimum breaks above the bearish trend line we have plotted on the chart.
Source: eSignal and FOREX.com
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