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Abstract: In the early European session on Tuesday, the EURUSD climbed to the highest level in five weeks, close to 1.0700, but lost momentum after the disappointing PMI release.

Fundamentals

The eurozone economy seems in jeopardy, and the latest PMI data shows it continues to deteriorate. In October, the manufacturing PMI fell from 43.4 to 43.0, while the service PMI fell from 48.7 to a worrying 32-month low of 47.8. The comprehensive PMI is not far behind, falling from 47.2 to 46.5, a 35-month low.

The economic situation in the eurozone is deteriorating. For more than a year, the manufacturing industry in the eurozone countries has been coping with the downturn. France and Germany, in particular, have almost the same degree of manufacturing recession.

However, the service industry in France is not all bleak. Although the economic activity index of France is lower than that of Germany, France has shown some resilience, and the rate of new business decline is not so fast. In addition, French companies are steadily increasing employment opportunities rather than reducing them.

Another noteworthy aspect is the continuous rise in service prices. Compared with the previous economic recession, the inflation of input prices and toll prices only slowed down slightly. This trend may pose a challenge to the European Central Bank (ECB). As Cyrus De La Rubia pointed out, "These data reinforce the suspension of the interest rate cycle, rather than thinking loudly about loosening monetary policy."

Market Observation: The weak economic activity in the eurozone confirms the situation of the ECB. At the same time, these data do strengthen the prospect that the eurozone economy is deteriorating. We expect that Thursday's meeting may be relatively low-key because the recent comments of the ECB clearly show that it is currently in a wait-and-see state. We also believe that the ECB has ended its interest rate hike cycle.

In addition, the ECB may cut interest rates as early as March next year, and the rate cut will exceed the current market expectations. We expect the ECB to cut interest rates by 100 basis points in 2024, which is higher than the market expectation of nearly 60 basis points. Even if the interest rate cut in March next year does not become a reality, we believe that more interest rate cuts may be reflected in the price than the current market pricing.

The discussion of the monetary policy meeting held by the ECB on Thursday may focus on the reinvestment of the Emergency Pandemic Emergency Purchase Programme (PEPP) and the prospect of future monetary policy, but it is still too early to decide to end the reinvestment of PEPP. Finally, we expect the ECB to keep interest rates unchanged, which is consistent with the general market view.

Technical Analysis

The EURUSD got a strong rebound during the New York session on Monday. It touched a 1-month high early in Tuesday's European session, close to 1.0700. The move was largely driven by a weaker USD, while technical factors were also at play. However, as the market came to massive selling levels and after the disappointing PMI release, the EURUSD lost upside momentum; currently, there is some pullback.

A 4-hour close below 1.0640 could attract more bears and open the door for a further slide towards the 200-period SMA at 1.0600 and 23.6% Fibonacci retracement at 1.0570.

However, if the bulls continue to defend this level (1.0640), the EURUSD may regain its attractiveness. In this case, the EURUSD will test the strong resistance levels of 1.0700 and 1.0750.

Overall, the EURUSD's rise on Monday was based on Friday's close above the bearish channel, which gave the market hope that the medium-term selling may have bottomed out. Nevertheless, the EURUSD doesn't seem to be able to get out of the neutral symmetrical triangle within the 1.0600 range, and a decisive rally above 1.0760 is still needed for the bulls to get a reversal to eliminate the negative risks; otherwise, the medium-term downtrend is unchanged. It is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 1.0640

Target price: 1.0350

Stop loss: 1.0736

Deadline: 2023-11-07 23:55:00

Support: 1.0618, 1.0591, 1.0496

Resistance: 1.0695, 1.0700, 1.0750