Fading Risk Sentiment Dampens EZ PMI & ZEW Data

EUR/USD ANALYSIS

• Better than expected EZ PMI and ZEW economic sentiment aren’t enough to hold back risk-off environment.
• Falling wedge in play which could point to subsequent upside to come.

EURO FUNDAMENTAL BACKDROP

The European trading session kicked off in a positive light this Tuesday from an economic standpoint beginning with eurozone PMI data (see economic calendar below) which beat expectations on the composite read. Although manufacturing numbers were slightly off the mark, the overall market reaction was positive in terms of the resilience of the region. Growth surprised many analysts considering the winter months which traditionally weighs negatively on the statistic and bodes well for the first quarter period. Declining energy pressures have aided in the disinflationary impact on goods and services thus increasing consumer demand.

That being said, the services sector is still being plagued by sticky wage costs that will continue to add hawkish pressure on the European Central Bank (ECB). The PMI data was then supplemented by a considerable beat on ZEW economic sentiment for February and has reached its highest level since February 2022 reinforcing the optimism within the region.

EUR/USD ECONOMIC CALENDAR

Source: DailyFX economic calendar

Money market pricing is now almost certainly in favor of a 50bps for March and the terminal rate for this cycle is hovering around the 3.5% level.

ECB INTEREST RATE PROBABILTIEIS

Source: Refinitiv

Looking ahead, US PMI data is scheduled and is expected to improve which could sustain the recent dollar move higher. Unfortunately for the euro, global risk sentiment has soured as a result of President Vladimir Putin’s reluctance to withdraw from Ukraine and hold off on participating in the nuclear treaty with the U.S. If we couple this with escalating US-China tensions, the USD has garnered support in the risk averse environment due to its safe haven appeal.

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Daily EUR/USD price action is now testing the lower bound of the developing falling wedge pattern (black) which coincides with the 1.0615 swing high (now support). Should political strains dissipate we could likely see a rebound for the euro up above 1.0700.

Resistance levels:

• 1.0800
• 1.0736/50-day SMA (yellow)
• 1.0700/Wedge resistance

Support levels:

• 1.0615/Wedge support
• 1.0500

IG CLIENT SENTIMENT DATA: BEARISH

IGCS shows retail traders are currently LONG on EUR/USD, with 53% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a short-term downside bias.

Contact and followWarrenon Twitter:@WVenketas