The Markit Euro zone Composite Flash Purchasing Managers’ Index (PMI), which is considered one of the best leading indicators of economic growth in the euro zone, reported that the readings for both the services and manufacturing industries fell below the crucial 50.0 level (it is the dividing line between growth and contraction). To be specific, the services PMI dropped to 49.4, while the manufacturing PMI came in at 49.0.
The PMI also showed weakness in two of the strongest economies in euro zone: Germany and France. In Germany, the manufacturing and services PMI failed to meet expectations and printed 50.1 and 52.6 respectively. Meanwhile, in France, the PMIs fell to 49.0 and 49.4.
I find this a quite troubling, as these two countries are the ones that are offsetting the weakness of the other euro zone member nations.
What do I mean by this?
In 2011, the euro zone contracted only 0.3%, thanks to the strength of Germany and France. France expanded 0.2% while Germany’s economy contracted by only 0.2%, smaller than what had been initially anticipated.
This new development underlines the region’s fragile state after the debt drama. Businessmen are worried about the economic environment, which is causing them to scale back on their investments. Moreover, analysts believe that the GDP report for the first quarter of this year will probably show no or negative growth.
What’s next for the euro?
Because analysts believe that the euro zone may continue to contract in the first quarter, we may see bearishness take over euro pairs. Remember, as traders, we tend to price in our expectations of the future.
If our expectations are that the euro zone will be fundamentally weaker in the near future, it would only make sense to “jump in” early and establish a short position.
Also, let’s not forget about the unimpressive Greek bailout deal. Yes, Greece was finally awarded funds to the tune of 130 billion EUR, but it doesn’t come without any complications. For one, the austerity measures are even stricter now and if Greece doesn’t live up to them, its debt-to-GDP ratio may easily surge back up to 160%.
Secondly, there remains the chance that private bondholders will not agree to write-down terms. If this happens, Greece may not receive any money at all!
I believe the markets are wary of this and that’s why the euro has failed to rally this week. It looks as if traders are maintaining a bearish stance on the euro and are refusing to unload all of their short positions.
Taking a look at the daily chart of EUR/USD, it seems to me that the head-and-shoulders pattern is emerging, with the second shoulder starting to show. We’ve even seen a two doji candlesticks form just around the 1.3250 area.
If you’re the aggressive type and believe that the euro zone is in for some trouble, then now may be the time to start building those short positions. On the other hand, if you want to wait for more confirmation, a more conservative entry would be to go short on a break of the neckline around 1.3000.
Whatever you decide to do, make sure you stay on top of your fundamentals game and stay informed! For all we know, the euro zone will turn it around it around, leaving all your short euro positions out to dry!