Is EUR/USD heading towards 1,0530? Signs of recession in Europe

Friday's session in the US was characterized by investors reducing risk. Stock indices were losing, which resulted in: SP500 recorded the worst week since March. The market remains concerned that the Fed is likely to keep interest rates higher for an extended period of time. The dollar gained moderately and the euro lost after weak preliminary PMI data for September for Europe. The yen weakened after the BoJ decision. Decisions by major central banks have confirmed that in some cases the end of the cycle has been reached or is imminent.

Recession in Europe

The signs of recession in Europe are becoming more and more clear. This was confirmed by Friday's PMI data. The euro zone services index - a reliable economic barometer - has not recovered from the August slump. Despite a slight increase to 48,4 points. it remains clearly in the recession zone. The index for the production sector, at 43,4 points, also does not give any hope for the situation to improve. Another increase in interest rates EBC becomes less and less likely in the coming months if we look at a set of such data. It is clear that economic weakness is not concentrated only in Germany, which has been particularly hit by high energy prices.

Increased interest rates in the euro zone (a total increase of 450 basis points) actually translate into a slowdown in all its countries. Today, Christine Lagarde will speak in the EU Parliament. It will probably confirm the ECB's position, which can be described as "wait and see". Therefore, the market's attention will slowly focus on Friday's data on flash inflation for the euro zone, which may be confirmed disinflationary trend. If the results are low, then the euro may again come under downward pressure and a break of the 1,06 level on EUR/USD may finally materialize.

Easing monetary policy in Japan

The market is still wondering whether the United States will be able to avoid an economic collapse despite more aggressive tightening of monetary policy compared to the euro area. This is of course possible. The US has a more flexible labor market, which may help overcome the crisis. Moreover, Europe is much more affected by the effects of the war in Ukraine and structural changes related to energy security will weigh more heavily on economic prospects in the longer term. PMI data for the US supported the Fed's optimistic forecasts. The indicator for services is still above the threshold level of 50 points.

EUR/USD is still within a descending channel in the medium term. Everything indicates that in the near future we will see another attempt to break the 1,0620 level. If it turns out to be successful, then a path towards 1,0520 will open, where the minimums from February and March 2023 are located.

The yen dropped in value again after the decision Bank of Japan. Although the decision to leave interest rates unchanged was widely expected, the market expected to receive some indication of when the ultra-loose monetary policy might end. According to president Kazuo Ueda The BoJ will continue to ease monetary policy in the current framework. Japan currently has the most negative real interest rates. Other central banks managed to increase them thanks to falling inflation and the current tightening of monetary policy. Jen found himself under pressure again Price USD / JPY "came out" above the level of 148,50 - the highest since November 2022.

Source: Łukasz Zembik, OANDA TMS Brokers