The euro hit parity against the greenback yesterday but managed to climb back slightly at the time of preparing the report. The euro sell-off was fueled by an 11-year-old German ZEW economic sentiment data for July. The US NFIB small business optimism index also hit a 91/2 year low. However, the market was concerned about the energy-related issues between Russia and Germany. Overall, the EUR/USD pair traded in a narrow range of 1.0000 and 1.0047 in the past 24 hours.
The ZEW indicator for economic sentiment fell sharply to -53.80 in July, from -28 in the prior month, and worse than the reading of 40.60 anticipated by economists. The index reading, reflecting the country’s economic situation, also declined steeply to 45.80, from 64 in June.
The ZEW economic sentiment indicator for the Eurozone, reflecting the financial market experts’ expectations of economic development in the region, declined to -51.10 in July, from -28 in the previous month and worse than the reading of 39 anticipated by economists.
The situation index stood at -44.40 in July, down 18 points from the prior month. Notably, inflation forecasts for the Eurozone rose by 6.80 points to -25.60.
Regarding current expectations, ZEW President Prof. Achim Wambach, Ph.D., said, “The expectations for energy-intensive and export-oriented economic sectors are falling particularly sharply, but private consumption is also estimated to be significantly weaker.”
In the US, the NFIB (National Federation of Independent Business) small business optimism index declined to 89.50 in June, from 93.10 in the prior month, but missed the reading of 92.60 anticipated by economists. The reported figure represents the lowest level since January 2013.
The decline in business optimism was fueled by worries over inflation. However, job openings remained robust as firms continued to expand their operations.
Furthermore, only 61% of small business owners anticipate conditions to improve over the forthcoming six months, reflecting the lowest level in almost 48 years.
Also, 34% of business owners highlighted inflation as their biggest single issue impeding their business, up six points from May and the highest level since 4Q 1980.
Surging inflation has encouraged the US Federal Reserve to implement a stringent monetary tightening policy. This could push the economy into recession. In the last four months, the Fed has lifted its benchmark interest rate by 150 basis points. The market anticipates another 75 basis point hike in July.
Interestingly, the steep rise in borrowing costs and concerns about an economic downturn has not affected labor demand.
As per the NFIB survey, 50% of owners were unable to fill job openings in June, a decrease by 1% from May’s figure, which represented the earlier historical high. Construction, manufacturing, and services industries faced a severe labor shortage.
The weak economic data from both countries (Germany and the US) is expected to keep the EUR/USD pair range-bound with a slight bearish bias (due to the Fed’s aggressive policy tightening) in the short term.
The historical price chart indicates that the EUR/USD pair is declining after facing stiff resistance at 1.0190. The next major support, technically and psychologically, is at 1.000. The currency pair is trading below its 50-day moving average while the MACD indicator is showing a negative reading. Therefore, we anticipate the currency pair to remain in a downtrend in the short term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
