23.08.202214:39 Forex Analysis & Reviews: EUR/USD: Any growth will only be a correction

As reported last week by Eurostat, the eurozone economy grew in the 2nd quarter by +0.6%, which is below growth expectations of +0.7% and below the first estimate of +0.7%. On an annualized basis, GDP grew by +3.9%, which was also below expectations of +4.0% and the same preliminary value.

At the same time, economic sentiment in the eurozone showed negative dynamics in August, falling from -51.1 points to -54.9 points. In Germany, whose economy is the locomotive of the entire European economy, the economic sentiment index from the Center for European Economic Research (ZEW) decreased in August from -53.8 points to -55.2 points, which turned out to be worse than economists' expectations. ZEW also noted that high inflation rates and the expected increase in heating and electricity tariffs lead to lower profit expectations for companies.

Eurostat's report on the eurozone's foreign trade balance, also published last week, continues to disappoint European investors: its deficit amounted to 30.8 billion euros in June against the backdrop of a rapid rise in oil and gas prices.

In general, it should be noted that until April 2020, the foreign trade balance of the eurozone was in surplus and grew to 26.8 billion euros. However, since March 2021, it began to decline rapidly, moving into a deficit zone as early as December 2021.

Private sector business activity in Germany and the Eurozone continued to decline in early August, with the German composite PMI slipping to 47.6 from 48.1 in July and the Eurozone to 49.2 from 49.9, data released this morning from S&P Global showed.

"The latest PMI data for the euro zone point to an economy in contraction during the third quarter of the year. Cost of living pressures mean that the recovery in the service sector following the lifting of pandemic restrictions has ebbed away, while manufacturing remained mired in contraction in August, when it recorded another record stockpiling of finished goods as companies were unable to move products in the face of falling demand," S&P Global Market Intelligence commented on this publication.

"Growth will slow down" and "a technical recession in the Eurozone is possible," Isabel Schnabel, European Central Bank's executive board member, said last week.

At the same time, the euro may remain under pressure against the backdrop of a possible cessation of Russian gas supplies and the indecision of the ECB.

Obviously, the risks of a recession in the eurozone increase the pressure on the euro and the EUR/USD pair. Today it updated the minimum since January 2003, dropping to the level of 0.9900, and the pressure on the pair remains, including due to the continued total strengthening of the dollar.

However, today the EUR/USD pair may correct after a strong fall, if the preliminary PMI indices for the manufacturing and services sector in the US (from S&P Global), as well as data on new home sales, turn out to be disappointing.

Their publication is scheduled for 13:45 and 14:00 (GMT), respectively.

Tomorrow, volatility in the EUR/USD pair may also increase sharply at 12:30 (GMT) when the US Census Bureau releases data on orders for durable goods and capital goods. Their growth is expected in July, by +0.6% and +0.3%, respectively.

If the data turns out to be significantly weaker than the forecast, then the dollar will be under pressure, and the EUR/USD pair will receive a new impetus to continue the upward correction. But so far, we can only talk about correction. In general, the downward dynamics of EUR/USD remains.