Unfazed By German Data, Euro Trades Higher – Some Buying Potential Remains

The Euro shrugged off early losses after the release of mixed data from the euro zone, to extend its gains to a third consecutive trading day on Friday. Bullish bias reigned in EURUSD as investors digested the outcome of the U.S Federal Reserve meeting on Wednesday.

Euro-area Economic Growth Slides to A 20-month Low

Data from Markit reported that the euro-area economy’s growth rate slid to a 20-month low in September. The Markit monthly composite PMI remained above the 50 mark that indicates expansion, but inched down to 52.6 in September from 52.9 one month earlier. The service sector weakened to 52.1 – the lowest since December 2014. Meanwhile, manufacturing improved to 52.6 in the current month, beating expectations for a reading of 51.5.

The slowdown in the pace of growth within the EU service sector was largely due to fatigue in Germany, where the service sector delivered its worst performance since May 2013. Europe’s largest economy saw its composite PMI drop to a 16-month low at 52.7 this month, from 53.3 in August. The general number was dragged down by a decline to 50.6 in the country’s service sector.

On the contrary, France posted its strongest performance in 15 months, with the measures for both manufacturing and services improving. According to the Markit report, France’s composite PMI rose to 53.3 from 51.9 in August. In particular, the manufacturing sector index rose to 49.5 in September from 48.5 one month earlier. Likewise, the gauge for services rose to 54.1 – the best result since the start of 2015.

The Pace for Further Hikes Seems to be Decelerating

The Euro declined a little in the early European trading hours but soon regained ground as the U.S dollar has been under greater pressure. Althought a rate hike by the FED in December is quite possible, the pace for further hikes seems to be decelerating.

Looking back to last December when the Fed raised its rates for the first time in a decade, four rate hikes were forecast for the following year 2016. However, until the end of the 2016 September meeting, not even one rate hike has been undertaken by the Fed, as U.S economic growth has remained uneven.

With a labor market moving towards full capacity, Fed chair Yellen said that the case for an interest rate increase had been strengthened. However, considering subdued economic growth abroad and weakness in inflation, as well as relatively sluggish performance in the manufacturing and service sectors at home, the time required for the world’s most powerful central bank to complete its policy normalization process may be longer than initially thought.

Technical Analysis

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Fig: EURUSD D1 Technical Chart

Euro found firm support at 1.11500 which has recently helped the pair avoid falling deeper into losses. The currency pair broke above the 23.6% retracement level yesterday and continues heading upwards in the last session ahead of the weekend. The RSI index has just confirmed the uptrend by surpassing the 50 line. Nonetheless, the downward trendline connecting the lower highs over the last couple of months is within sight. The resistance offered by the downward sloping trendline may contain the upside. Thus further gains currently seem limited.

Trade suggestion

Buy Stop at 1.12145, Take profit at 1.12500, Stop loss at 1.11800

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