After holding the $1.3000 support pivot numerous times over the past two weeks, the pivot finally gave way as weak German PMI data (47.9 actual vs. 49.1 estimates) fueled more talk of possible ECB rate cuts in the coming months. Although the pair did close below the $1.3000 level, some analysts found the lack of follow through to the downside impressive and believe the key will be to see how it reacts to data in coming sessions. The main report due out Wednesday will be the German IFO, which is released at 8:00 GMT.
According to Kathy Lien of BK Asset Management, "Traders reacted very negatively to the PMI report, taking the EUR/USD from $1.3060 to $1.2975 in approximately 30 minutes. But since then, it has failed to extend its losses. This may have to do with the steady eurozone PMI composite index and the rise in U.S. and European stocks.
She went on to add, "If tomorrow's German IFO report also surprises to the downside and shows deterioration in business confidence, the European Central Bank could lay the foundation for a rate cut when they meet next week. Recent comments from policymakers show an increased inclination to ease that will be hardened by a drop in business confidence and recent economic reports from China and the U.S."
Due to recent dovish comments from ECB officials, as well as weak economic data from around the globe, some analysts who were previous calling for no change in the ECB interest rate policy are now revising their outlooks.
According to analysts Richard Barwell and Xinying Chen of RBS: "Last month we argued that the rate cut debate was on a knife edge, but stuck with our forecast for rates on hold on the basis that the outlook could improve, or the Council could fashion an effective non-standard tool." They expand, noting: "We think that was the wrong call."
Richard and Xinying went on to comment: "We are now expecting a cut in the main refinancing rate, largely in response to commentary by members of the Governing Council since the April meeting, which suggests to us that the ECB has reached the point where it has to do something."
From a technical perspective, initial support sits at $1.2970 (low of previous day), followed by $1.2900 (the 200 week MA). First resistance sits at $1.3020 (previous support, now resistance on daily chart), followed by $1.3058 (the 9dma). Some analysts recommend taking a step back and looking at the bigger picture in order to more accurately asses recent developments.
According to Fan Yang, CMT, of FXTimes, "Looking at the bigger picture, the market has made a reversal swing in April against a bear run from $1.3710 to $1.2744, thus flattening the momentum and the 200-4H SMA. He went on to add, "While the April upswing looks very sharp and has potential of extending in the medium term, there remains short-term downside risk toward 61.8% retracement at $1.2919 or even a deeper retracement to around $1.2842, a 78.5% retracement."