Forex Analysis – Trade of the Day: EUR/GBP 2nd September 2014

Spanish Manufacturing PMI

Yesterday, at GMT 7:15 a.m., the Markit released the Spanish Manufacturing figure, which measures the level of a diffusion index by surveying Spanish purchasing managers from the manufacturing sector. Markit usually survey 400 purchasing managers. A PMI reading above 50.0 suggests an industry expansion. In contrast, a PMI reading below 50.0 suggests a contraction.

Since businesses react very fast to changing economic climates, their purchasing managers usually have the most updated perception regarding the economy. Hence, analysts consider the Manufacturing PMI to be a leading indicator of the economic health of a country.

Last month, the Spanish Manufacturing PMI figure came out at 53.9, and this month the forecast was set slightly lower, at 53.4. However, the actual figure came out much lower than expected, at 52.8.

UK Manufacturing PMI

At GMT 8:30 a.m., the Markit also released the UK Manufacturing PMI. The UK Manufacturing PMI figure measures the diffusion index based on a survey of 400 purchasing managers as well, and it is also considered as a leading economic indicator of the country.

Last month, the UK Manufacturing PMI figure came out at 54.8, and this month the forecast was set optimistically, at 55.1. The actual figure, however, came out at 52.5, much lower than the expectation.

Trade Recommendation for the EUR/GBP

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The EUR/GBP had been trending down since early April, 2014. However, the pair had a minor retracement in the second week of August. Since then it has resumed the downtrend. Last Friday, the EUR/GBP managed to close below the support level at 0.7925.

The market concluded that the worse than UK Manufacturing PMI came due to a weak euro area demand. Furthermore, the weaker than expected Spanish Manufacturing PMI figure confirmed that perception. As a result, yesterday, the EUR/GBP penetrated below the Friday’s low, at 0.7905.

The macroeconomic fundamentals are overwhelmingly suggesting a further decline of the EUR/GBP. If the downtrend continues, the EUR/GBP may find the next support around the 0.7870 level, which is the low of July 23. If the pair manages to close below the 0.7870 level, it would certainly confirm the bearish market sentiment and It would suggest a PUT in the EUR/GBP.

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Asif Imtiaz

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