EUR/USD Forecast: Recovery? Not so fast, upbeat German data is insufficient to beat the bears

Is Europe out of the woods? German Purchasing Managers' Indexes provide hope – but the continent's locomotive and the euro still have some way to go.

Markit's preliminary German Manufacturing PMI beat expectations with 45.2 points – yet still below the 50-point threshold that separates expansion from contraction. The Services PMI also exceeded estimates with 54.2 points, reflecting more significant growth. 

Overall, the picture is encouraging – the slump in manufacturing has not dragged the whole economy down, and now both are recovering. 

France, the continent's second-largest economy had more mixed results – the Services PMI missed with 51.7 and manufacturing beat ith 51 points. The figures reflect modest and balanced growth.

ECB decision, coronavirus, Italy's elections

These statistics have been released less than 24 hours after the European Central Bank conveyed a cautious message about the recent green shoots. Christine Lagarde, President of the ECB, announced the launch of a strategic review, which she aims to conclude by year-end. The former Managing Director of the International Monetary Fund wore an owl pin – echoing her words of aiming to be wise likely the nightly bird, rather than being a hawk or a dove. 

Apart from being unenthusiastic about the recent rise in business surveys and inflation, Lagarde said that the climate crisis is also a consideration – potentially opening the door to more money printing. The ECB continues buying €20 billion euros of bonds every month.

Lagarde also mentioned protectionism as a downside risk, and tensions between the EU and the US remain intact. In a speech in Davos earlier this week, President Donald Trump repeated his threat to slap tariffs on the bloc. Deliberations in the World Economic Forum conclude today and they include a panel featuring Lagarde and US Treasury Secretary Steven Mnuchin. 

The coronavirus outbreak in China and elsewhere continue gripping markets. The world's second-largest economy shut down transport links to Wuhan – where the diseases originated –and other cities in the region. Several Chinese cities canceled their New Year's celebrations. 

On the other hand, the World Health Organization refrained from announcing a major international disruption. The WHO's decision has allowed markets to recover and pushed the safe-haven dollar and yen lower. 

The Italian region of Emiglia Romana goes to the polls over the weekend in what is seen as a test to the coalition government. The populist Liga party may oust the centrist Democratic Party, which is part of the ruling coalition. The other partner in the government, the Five Star Movement, lost its leader earlier this week. Luigi di Maio left a void at the head of the party that was the winner of the 2018 elections, but that has since been losing ground.

Late in the day, Markit's US flash PMIs may be of interest, but other topics are likely to have the upper hand in shaping euro/dollar's price.

EUR/USD Technical Analysis

EUR/USD has dropped below the long-term support line, but the break still awaits confirmation. Momentum on the four-hour chart is to the downside and the pair is trading below the 50, 100, and 200 Simple Moving Averages. On the other hand, the Relative Strength Index is close to 30 – near oversold conditions.

Overall, bears are in the lead

Support awaits at 1.1135, which is the recent low. It is followed by 1.10,  a round level and also a low point in early December. It is followed by 1.0980, which was a swing low in late November. 1.0950 is next.

Resistance awaits at 1.1070, which provided support earlier this week. It is followed by 1.1110, a swing high from Thursday. Next, 1.1125 is the convergence of the 100 and 200 SMAs. 1.1175 is the next level to watch.