Following the global stock market sell-off earlier this month, the euro was quick to recover most of its losses in a short period of time. While other currencies (such as the Australian dollar or the British pound) never fully recovered, there was no shortage of dip buyers looking to go long the euro. Looking at EUR/USD, it took just four trading days to recover to the critical 1.25 level after the pair fell to around 1.2250 in the second week of February. Seeing strong momentum, we upgraded our short-term outlook on the common currency on February 16 accordingly. Unfortunately, this move was only a temporary phenomenon and the currency has since run out of steam. Notably, EUR/USD failed to make a higher-high last week, an indication that sentiment is less bullish today. We expect to downgrade our short-term outlook later this week to neutral. An overview of EUR/USD since 2017 is shown below for reference:
Back to neutral? EUR/USD running out of steam
Source: TradingView
With technical factors pointing to a more bearish outlook on the currency, it is tempting to suggest that a euro bear market is around the corner. The last time the euro rally paused in October 2017 (following a disappointing ECB meeting and over-extended speculator positioning), the euro resumed rallying by December. While bullish momentum is certainly waning today, other factors remain supportive for a higher euro. In particular, ongoing economic expansion (even following today’s lower-than-expected manufacturing PMIs), monetary tightening expectations and moderate sentiment means that the euro can push higher. Unless economic fundamentals and sentiment point to a weaker euro going forward, we remain mildly bullish on the euro’s prospects.
Expansion looks set to continue, albeit at a slower pace
While economic data from the Eurozone was surprisingly strong last year, figures this year have often come in below estimates. Earlier today, both manufacturing and composite PMIs were below expectations, signaling lower-than-expected future growth. With the latest manufacturing PMIs at 58.5, overall Eurozone growth remains in positive territory. This being said, the consensus expectations were too far ahead of reality.
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