EUR/USD bulls look surprisingly strong amid the weakening euro-area economic data

A drop in the US services PMI from 58 down to 56.7 in January didn’t discourage the EUR/USD bears. The pair has closed in the red zone three out of four trading days. A decline in Purchasing Managers’ Index looks like a calm after the holiday season. The ISM respondents are concerned by the consequences of the US government shutdown, but they are quite positive about general conditions for running business. It seems that the US economy is able to grow at the same pace if, of course, there is not any unplanned vacation of the executive power or any other negative surprise. This fact is the dollar advantage over the euro.
Can the single European currency be popular if Italy fell in technical recession in Q4 2018, and its PMI goes down to almost the value of 50 in January? Furthermore, the euro-area retail sales are down to 1.6% MoM in December, 2018, which is the worst drop since May, 2011. Besides, the European Commission cuts its euro-area growth forecasts from 1.9% down to 1.4%. In addition to the export problems, resulted from trade wars, the domestic demand in the euro area is also weak. And the drop in the US PMI can’t be even compared to that in Europe. European and Chinese PMI started going down since early 2018, when neither IMF nor any other authoritative institutions didn’t even suggest the revision of forecasts.
Projections of European Commission for GDP rates
Source: Bloomberg
Dynamics of PMI
Source: Wall Street Journal
If you compare the economic data, the euro position looks surprisingly strong. Since mid-October, 2018, the EUR/USD pair has been trading in the price range of 1.1265-1.1485; a few tries of the euro bulls to drive the price above the upper border failed. Yes, the dollar is pressed by a change in the Fed course, which was going to continue monetary normalization just in December and insisted on a long pause in January. However, this is not a single factor. According to Société Générale (PA:SOGN), the euro is supported by the strengthened yuan. Once the USD/CNY rate resumes going up, the major currency pair may drop as low as at 1.12.
Dynamics of Euro and Yuan
Source: Trading Economics
Certainly, the correlation between the euro area and China is very important for the EUR/USD future trend, however the key factors are still how deep PMI may drop and what supports its recovery. In my opinion, the troubles of German automotive industry, result from adjusting to new standards and are temporary; and the mass fiscal stimulus of the PBOC should increase foreign demand, supporting the euro-area export. In the short term, the euro bears can draw the EUR/USD rate down to bottom part of the consolidation range of 1.1265-1.1485 and even below it for a while; but the euro’s middle and long-term outlook seem to be more optimistic than that of the US dollar. Provided, of course, that there isn’t a trade war between the USA and the EU.