DailyFX analysts were undeterred by the bullish Euro sentiment in May and stuck with their bearish bias. Although, we saw profit potential to start the month, the choppy price action that followed limited future gains.
Concerns over the scope of a global recovery started to weigh on the euro at the start of June as the single currency has been highly correlated with risk trends. Yet, the Euro-Zone economy began to see evidence of stabilization as PMI manufacturing rose to its highest level in nine months. However, we saw the service sector take a step back and both remained in contraction. Nevertheless, optimism is on the rise with both consumer and business confidence trending higher. The German ZEW survey jumped to 44.8 from 31.1 in June with consumer confidence reaching an eight month high of -25. The improving sentiment and concerns over the dollar as the reserve currency helped provide euro support preventing the slide that our analysts were expecting. It was also aided by speculation that the ECB could be the first to raise interest rates due to mounting inflation concerns on the back of rising commodity prices and quantitative easing efforts.
[B]What Has Changed?[/B]
The Euro has continued to find underlining support from continued talk of replacing the dollar as the reserve currency. Although expectations are that it will be some time before this happens many expect that China and Russia two of the largest holders of dollar reserves will look to start diversifying their portfolios with the euro as a possible substitute. On the other side if the ledger is ECB President Trichet which called for the U.S. to defend the dollar as it would weaken the euro and make the regions exports more attractive. Meanwhile, the ECB has continued their measured approach and refused to bring rates below 1.00% but have left the door open for further easing which could limit euro bullish sentiment.
Considering the euro’s correlation to risk trends, forex traders should pay attention to the upcoming corporate earnings season as it will play a significant role in determining future sentiment. Also, a theme that could re-emerge is that the European economy will be the laggard of the developed nations in returning to expansion as the global economy recovers which could weigh on the euro. The EUR/USD continues to remain range bound as it finds support above 1.3795-the 38.2% Fibo of 1.2884-1.4340 which has started to force our analysts to abandon their bearish bias. Several have exited their shorts positions with others waiting for a break below the technical level to recommit.
