Yesterday, the euro weakened against the dollar but recovered some of its losses overnight. The reason for yesterday's decline was straightforward: U.S. economic data was stronger than European data, restoring some demand for the dollar.
Starting with Europe, business activity in the eurozone is measured by the Purchasing Managers' Index (PMI). It is based on company surveys, and a reading above 50 indicates expansion. The Composite PMI came in at 51.7, compared with expectations of 51.9, while the Services PMI stood at 51.4, against a forecast of 51.7. Economic activity is still expanding, but at a slower pace than the market had anticipated. France was the biggest disappointment, with its index falling to 46.2, indicating contraction. Germany delivered a positive surprise, as its Services PMI rose to 52.5. However, Germany's stronger performance was not enough to offset the weakness in France. Inflation accelerated to 4.0% from 3.8%, exactly in line with expectations. When prices rise faster while economic growth loses momentum, this combination does not support the euro.
The situation in the United States was different. The ADP report shows how many new jobs were created by private businesses. In October, employment increased by 86,000, compared with expectations of 67,000. Companies are hiring more actively than anticipated, meaning that the Federal Reserve, the U.S. central bank, has little reason to refrain from further interest rate increases to combat inflation. The trade deficit, which represents the difference between the value of goods and services the United States imports and exports, narrowed to $105.0 billion in September, compared with expectations of $107.9 billion. The ISM Services Index came in at 54.5, against a forecast of 54.8. Although this was slightly below expectations, the reading remained above 50, indicating continued expansion. Taken together, these developments restored demand for the dollar and pushed the euro back from its recent highs.
Today, the euro has an opportunity to recover. The eurozone Producer Price Index (PPI) will be released. It measures changes in prices at the producer level and generally provides an early indication of future consumer price movements. Therefore, the market views it as an indicator of the future direction of inflation and the ECB's potential policy decisions. The annual rate is expected to accelerate to 10.9%, compared with 8.2% a month earlier. If the figure exceeds expectations, expectations of further ECB interest rate increases will strengthen, providing support for the euro. Other releases will include German industrial orders, which are expected to increase by 4.9%; French industrial production, which is forecast to rise by 0.4% following a 0.3% decline; and Italian retail sales, for which no change is expected.
ECB President Christine Lagarde and Bundesbank President Joachim Nagel are also scheduled to speak today. Their policy stance is already clear. The ECB remains on track for one final interest rate increase in December, and their latest comments are likely to confirm this position. If economic data is strong and the central bank maintains a measured tone, the euro may hold its ground and even appreciate.
Momentum
For an upward move, attention should be paid to the 1.1272 level, which is currently just nine pips above the price. If the euro consolidates firmly above this level, the next targets will be 1.1298 and then 1.1336. Today's economic releases could support this scenario, as a higher-than-expected Producer Price Index would strengthen expectations of further ECB rate increases. Therefore, the upward scenario is considered the primary one.
For a downward move, the key level is 1.1245. A break below it would open the way toward 1.1214 and 1.1177. Yesterday's dollar strength, supported by U.S. economic data, favors this scenario. However, the ECB's measured policy stance and the possibility of stronger European data work against it. This scenario cannot be ruled out, but it is considered less likely.
Mean Reversion
The upper reference level is 1.1281, while the lower one is 1.1230. The upper level is only nine points above the breakout level of 1.1272, meaning that the price could reach it quickly following a breakout. The key question is whether the upward movement will continue or whether this will be a false breakout followed by a decline. A reversal near 1.1281 should only be considered once the upward momentum clearly begins to fade.
The lower level of 1.1230 lies along the downward path between 1.1245 and 1.1214. If the decline reaches this level and the price quickly rebounds above it, this would indicate a reversal rather than a continuation of the breakout.
