Third Wave Fears Hurting Eurozone Outlook

Sentiment in the eurozone has turned firmly negative over recent days amidst the potential start of a COVID third wave there. With countries such as France, Germany and Italy announcing an extension or return to lockdown conditions in response to ballooning infection numbers, the prospect of a big summer for European tourism is looking increasingly diminished.

Strong April Flash PMI Readings

However, there has been some good news for the eurozone this week with the latest set of PMI readings this morning showing further strength in the recovery there. The eurozone flash manufacturing PMI for April was seen spiking to 62.4. This marks the quickest pace of growth in the sector over the last 23 years and a firm improvement on the prior month’s 57.9 reading.

The services sector was also seen rising with the services PMI hitting 48.8, a rise from the prior month’s 45.7 but still just below the 50 level which signals expansion. Nevertheless, given the bigger hit suffered by the services sector, the trajectory is encouraging.

Downside Risks Ahead

Given the doom and gloom around the current third wave fears, however, it seems unlikely that today’s data will do much to lift the euro although European stocks have been a little more resilient. The big question now is what the final April readings will look like. With some of the economic bloc’s key members going back into or extending lockdowns over the next month, it seems reasonable to expect that the services reading at least will move lower. Manufacturing has actually proven rather resilient over the course of the pandemic. The surge in online shopping and the amount of company’s whose staff have been working from home has fuelled a boom in demand which has been met by ever increasing output from factories.

Looking ahead, the outlook for the Euro looks skewed to the downside. With the US Dollar surging on increased safe haven inflow and fears growing over the potential third wave in the eurozone, EURUSD looks poised for further downside in the near term.

Technical Views

EURUSD

Following the breakdown below the rising channel from last year’s lows, EURUSD has been moving in bearish channel. For now, the structure can be viewed as corrective, with the medium-term bias stull in favour of a continuation higher. However, if price breaks below the current 1.1802 level, this opens the way for a test of deeper support at the 1.1611 level next and 1.1490 below.

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