The European economy shows signs of a significant setback after the recovery experienced after the end of the period of confinement.
The sudden increase in new cases of infected in almost all European countries, restrictive measures to travel between countries, and other measures that limit the use of services such as bars and restaurants, have caused an unexpected drop in PMI figures, especially high in services, which fell to 50.1 vs. 54.5 expected, a level that borders on the limit of economic contraction.
In Germany, in particular, the drop is also of the same magnitude, with a figure of 50.8 vs. 55.1 expected. Manufacturing PMIs in Europe also fell to 51.7 vs. 52.9 expected.
These data represent a significant setback to the expectations of a rapid recovery in the economy.
The current situation of the pandemic, with little or no possibility of improvement in the short term, has increased risk aversion among investors.
From now on, all eyes will be on the responses that both governments, the European Commission, and the Central Bank give to this new crisis scenario. The aid fund for the coronavirus approved by the European Commission recently is going to fall short to face the situation, and the market will need an increase in it or at least complementary measures carried out by the governments of each country.
European stock markets have reacted lower, with Germany30 falling close to 1.5%.
Its future performance will depend on the evolution of the disease in Europe and whether governments can eliminate the restriction measures currently in force, something that will not happen in the short term.
At this juncture, Germany30 could have a downward correction that will take it to its next support levels in a short time, which are located around 12190 and 11950.
The Euro has also suffered the consequences of this reversal of the European economy. In the case of EUR/USD, the fall has been accentuated as the pair had already started a downward corrective movement caused by an upward technical correction of the Dollar.
The market is likely to start anticipating new action by the European Central Bank with further stimulus measures that could increase the amount of its asset purchase program or provide more liquidity to the system through TLTROs. In any case, it further swells its expansive monetary policy, which would imply downward pressure on the Euro or at least a halt in its upward movement.
Technically the pair has broken down its first intermediate support at 1.1820 and is heading towards the primary support area around 1.1700-1.1720. Below it paves its way, from a technical perspective to the 1.1500 area with intermediate support at 1.1610.