Some corrective euro weakness in the near term – Scotiabank

Eurozone PMI data has been weak throughout this month. German and French data all reflected weaker or slower activity, notes Shaun Osborne, chief FX strategist at Scotiabank.

EUR falls as weak PMIs support outlook for mild contraction

“French services slumped after Olympic momentum faded, and composite readings from both France and Germany are now below 50, putting euro zone preliminary data at 48.9, down from 51 in August and with well below the expected 50.5. Yields fell, driving spreads against the USD wider, as markets saw a higher marginal risk of an October ECB rate cut (10bp price).”

“The Bundesbank’s monthly report last week already acknowledged that a mild contraction was likely already underway in Germany, but the decline was not expected to be long-lasting. Policymakers can continue to focus on inflation rather than growth concerns.”

“Friday’s euro rally and today’s — so far — losses may pave the way for near-term corrective euro weakness. A lower close for spot today would form a bearish ‘evening star’ pattern on the daily chart, strengthening EUR resistance in the 1.12 area and may cause some corrective EUR losses back to the 1.10 support area.”