looking at the euro area major business sentiment surveys, we observe continuous build up in business confidence and activity.
the euro area services and manufacturing PMIs have reached in july expansion levels greater than the pre-pandemic period.
in addition, the european commission Economic Sentiment Indicator (ESI) is continuing a straight forward recovery from its April bottom. however, we saw a slight decline in consumer and construction confidence.
those data are leading indicators that describe how the pace of recovery would look like in the third quarter.
generally we expect the third quarter to be better and less negative than the second quarter.
that movement towards recovery in the eurozone, supported by the ECB, and the new agreed upon EU stimulus budget of 700 Bln eur carries a great support for the euro to keep its upwards direction for a much longer period of time and to reach levels unseen since years.
on the other side, we observe a pretty similar situation in the United States, where the ISM PMI data have increased strongly in june. indicating the start of recovery phase in the third quarter.
this confidence in the pace of recovery, also helped by the FED and the U.S government huge stimulus action to face the crisis, has pushed investors to look for new investing opportunities and buying the Dip in the stock market.
as a result, the sell off in the U.S.Dollar takes place, as the Risk on sentiment starts to build up. investors and portfolio managers started withdrawing from safe haven USD cash looking for high yield profitable opportunities.
the risk on sentiment can be checked through the continuous decline in the VIX and the DXY.
risks to the outlook
generally there are some risk themes against the Bullish outlook for the EUR USD.
recent decline in consumer sentiment surveys in many G10 countries including the euro area and the united states are one of the risks against the outlook.
the rising numbers of coronavirus new infections and the re-lockdown of many regions and cities makes it difficult for many businesses to reopen and weighs on the path of job creation.
this was seen in the euro area through the continuous increase in the unemployment rate to 7.8% in june, and through the persistent rising numbers of initial and continuing jobless claims in the United States which is expected to offset the market sentiment when the NFP report will be released this week.
through what we have explained above, we expect some EUR/USD price correction to the downside due to uncertainty about risk themes stated above.
the downside retracement does not indicate by any means a total change in the Bullish EUR USD mid term view. but rather is a slowdown in price momentum giving traders who missed the first rally the opportunity to find out some new entry points and buy the Dip.
as we see in the long term monthly eur usd chart above, we have recently crossed the long term downtrend with high momentum.
the EUR/USD started the month of August with a red candle, retracing back from two years high at 1.1910.
the price is expected to continue for a while in undecisive sideways behaviour around the Fib retracement level of 23.6% at 1.1707 before regaining momentum and continuous to rally higher
a clear breakout of the range zone is expected to take place in the upcoming couple of weeks, and may lead the eur usd to resume trending higher.
our preliminary target is to reach 1.2137 at the fib retracement level of 50%. a second and final target is at the highest point in past six years at around 1.2500 and that matches typically the Fib level of 38.20%