EUR/USD Forecast: Euro weakens as European economy loses momentum

Following Thursday's slide, EUR/USD came under renewed bearish pressure early Friday and broke below 1.0900. In case buyers fail to defend 1.0870, the pair could suffer additional losses ahead of the weekend.

FOMC Chairman Jerome Powell's hawkish rhetoric on the second day of his congressional testimony and the risk-averse market atmosphere helped the US Dollar (USD) outperform its rivals on Thursday. Following a quiet Asian session, the pair turned south once again on growing fears of a recession in the Euro area, touching its lowest level in a week near 1.0850.

Data from Germany and the Eurozone showed that activity in the manufacturing sector contracted at an accelerating pace in early June, with HCOB Manufacturing PMI dropping to 41.0 and 43.6, respectively. Although HCOB Services PMIs held in the expansion territory above 50, they retreated sharply from May levels.

"After Eurozone GDP fell for the second time in a row in the first quarter, the probability has increased somewhat that the GDP change will again carry a negative sign in the current quarter, due in part to weak services activity in France," said Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.

According to Reuters calculations, the 15% probability of a 4.25% European Central Bank (ECB) terminal rate declined to virtually 0% after the release of the PMI readings. 

Ahead of the weekend, S&P Global will release Manufacturing and Services PMI data for the US. In case there is an unexpected rebound in the Services PMI, the USD is likely to preserve its strength. On the flip side, a significant decline should have the opposite effect on the USD's valuation.

Market participants will also pay close attention to risk perception. US stock index futures are down between 0.3% and 0.5%. Even if disappointing PMIs weigh on the USD, a bearish reaction in Wall Street's main indexes could make it difficult for EUR/USD to stage a rebound.

EUR/USD Technical Analysis

EUR/USD broke below the lower limit of the ascending regression channel and the Relative Strength Index (RSI) indicator on the 4-hour chart fell below 40, reflecting a buildup of bearish momentum.

EUR/USD was trades near 1.0870, where the Fibonacci 38.2% retracement of the latest uptrend is located. If the pair starts using that level as resistance, it could stretch lower to 1.0820/30 (100-period Simple Moving Average (SMA), 200-period SMA, Fibonacci 50% retracement) and 1.0780 (Fibonacci 61.8% retracement).

On the upside, 1.0900 (psychological level) aligns as interim resistance ahead of 1.0920 (Fibonacci 23.6% retracement) and 1.0940 (lower-limit of the ascending channel, 20-period SMA).