EUR/USD Forecast: Selling opportunity? Headline hides unflattering reality, technicals bearish

Is the locomotive back on the tracks? EUR/USD has advanced in response to encouraging headlines, but there is more than meets the eye. 

Markit's preliminary read for February has shown that the German Manufacturing Purchasing Managers' Index scored 47.8, far above 44.8, that was expected and 45.3 recorded in January. While that is still below 50 – thus reflecting contraction – it is the best score in many months.

The continent's largest economy is dependent on its industrial sector and exports to China. Markit has noted that those surveyed pointed out that the coronavirus outbreak has been "fairly limited so far."

However, several analysts have observed that half of the gain is attributed to a drop in supplier delivery time due to the respiratory disease's impact. Slower fulfillment is being used inversely, by the data firm as postponements may turn into a higher workload down the line.

In normal times, this calculation makes sense. Still, in the case of the extraordinary circumstances surrounding the virus, these delays may turn into cancelations and do not bode well for Germany or the eurozone. 

Other PMIs have mostly been better than expected, yet the magnitude of surprise and the significance has been lower. German Services PMI missed with 53.3 while France's Services sector's figure beat with 52.6. The French manufacturing PMI slipped below 50 to 49.7.

These forward-looking surveys provide an indication of growth in the current month.

Dollar strength, coronavirus updates

Before the PMIs, the US dollar has been on a winning streak. The Philly Fed Manufacturing Index – usually a minor market mover – smashed estimates with a score of 36.7 in February. Almost all economic figures from America have been upbeat. 

In the old continent, the European Central Bank's meeting minutes released on Thursday repeated the same stances cautious optimism. The euro seemed to ignore the publication.

The greenback is also benefiting from safe-haven flows stemming from fears related to the coronavirus outbreak. Investors are becoming more worried about the spread of respiratory disease in South Korea, which has designated two cities as "special care zones." Seoul reported 204 cases, including in a military base. 

China has continued urging companies to return back to normal and expressed optimism about developing vaccines and finding cures. Beijing has also taken several steps to calm markets and help companies. However, it also reported a plunge of 92% in car sales in the first half of February, and its latest reports about the number of infections have confused. 

Further headlines are set to move markets. In previous Fridays, the mood tended to worsen as the end of the trading week drew closer. Will this phenomenon repeat itself? 

Markit's preliminary PMIs for the US are due out in the American session and could move markets. It is essential to note that in America, ISM's surveys carry more weight than Markits'.

Overall, further reactions to PMIs and coronavirus developments are set to rock markets. 

EUR/USD Technical Analysis

Euro/dollar is capped under 1.0820, which has capped it in recent days and has also provided support earlier. Moreover, it is the upper bound of the "Macron Gap" from 2017. Failure to breach it opens the door to fresh falls.

The pair's technical state is exacerbated by the return of the Relative Strength Index on the four-hour chart above the 30 level – implying an exit from oversold conditions. EUR/USD continues trading below the 50, 100, and 200 Simple Moving Averages. Momentum remains to the downside. 

Bears are in control.

Critical support awaits at 1.0777, the new 2020 trough, and the lowest since 2017. The next lines to watch are 1.0720 and 1.0655. 

Above 1.0820, resistance awaits at 1.0860, which was a swing high last week. The next lines are 1.0879, 1.0890, and 1.0905.