With the Greek situation and sovereign debt issues temporarily shelved, Euro traders have shifted their focus to the Euro Zone economy. Although the European Central Bank is expected to hike its benchmark interest rate 25 basis points on Thursday, today’s weak economic data suggests this may be the last increase for several months.
A potential economic slowdown for the Euro Zone was signaled following the release of the final June Purchasing Manager’s Index. The reading for the 17-nation Euro Zone fell to a 20-month low of 53.3 from 55.8 in May. The actual figure missed the estimate which was looking for a down reading, however, a slightly better number. Although 53.3 represented a drop, the index still remains above the critical 50 level. A drop below this level will be a serious blow to growth projections.
More pressure for the Euro came after the European Union’s statistics agency Eurostat reported that May Retail Sales in the Euro Zone fell 1.1%. This monthly decline was worse than the forecast for a 0.8% drop.
Traders have already priced in an interest rate hike this week, however, some are repositioning due to the diminished outlook for the economy going forward. Following the ECB’s rate hike on Thursday, look for President Jean-Claude Trichet to highlight the slowdown in his new conference. Traders will be especially interested in his longer-term forecast now that it appears the Euro Zone economy may be softening.
Technically, the main range remains 1.4887 to 1.3925. Last week the September Euro burst through the 50% level of this range at 1.4406, but managed to run into selling pressure at the 61.8% level at 1.4520.
The subsequent daily closing price reversal signaled a possible short-term top. Based on the rally from 1.4070 to 1.4547, expectations are for a minimum 2 to 3 day break back to 1.4309 to 1.4252.
Since the Euro wasn’t strong enough to take out the June top at 1.4652, it still has the appearance of a developing a secondary lower top formation. This pattern can develop into an even more bearish scenario if a few of the recent lows begin to fail.
