Weak macro EU data
While the manufacturing PMI continues to show progress, 53.7 vs. 51.9 expected, the services PMI falls to 47.6 from 50.5 the previous month.
These figures result in the composite PMI, the average between the two PMIs, suffering a severe setback to 50.1 vs. 51.9 in the previous month, placing this composite figure on the edge of the expansion zone 50.0 level.
A correct reading of these data shows us a clear sign of the effects of this crisis caused by a pandemic.
While productivity activity is recovering as a result of the fact that exports are maintained, which was reflected in the latest economic figure for the Euro area's trade balance with a surplus similar to that of the months before the crisis, the services sector, which constitutes a large part of the eurozone's GDP, is deteriorating due to restrictive social measures imposed to combat the pandemic.
It is evident that domestic demand is shrinking, partly due to the drop in consumer confidence and due to the decrease in the income of consumers who are in a situation of unemployment or have reduced wages.
Fiscal policy measures approved by governments and the European Commission will play an essential role in supporting the economy, but their effects will not be seen until next year.
But it seems evident that additional monetary policy measures will be needed by the ECB if, as the figures indicate, the general recovery does not take place.
The forecasts on upcoming GDP are different depending on each country. The figures provided by institutions and research entities are also highly variable, but these PMI figures, if they remain so weak, do not anticipate the best economic growth scenario.
If the ECB takes note of this situation and decides to intensify its monetary stimulus policy, either by lowering interest rates even further, increasing the volume of the asset purchase program, and/or lengthening it over time (as the Federal Reserve has already done) the downward pressure on the Euro that we have witnessed in the last week would be increased. This would eliminate the ECB's concern about a stronger Euro and its negative effect on the economic expansion of the Euro area.
The Euro takes a battering
EUR/USD chart shows us a large reversal pattern that would be activated with a daily close below the area where it currently is, around 1.1690-1.1700.
The theoretical projection of this pattern is around 1.1450.
If we consider Fibonacci retracements of the last bullish leg that begins in June of this year, we find intermediate supports at 38.2% Fibonacci retracement located right at the current level 1.1690, 0.50% retracement at 1.1590, and 0.618% retracement at 1, 1490.
A downward movement of EUR/USD of this magnitude would have to be motivated by two causes: a clear manifestation of the ECB of being willing to further expand monetary policy, and a less weak Dollar that would in turn occur in the event of setbacks or lack of advances in the North American stock markets.