The eurozone economy contracted during the past two quarters albeit mildly, entering a technical recession. Traders will look to see whether the negligible downturn has worsened when flash S&P Global PMI figures for the month of June arrive on Friday at 08:00 GMT. Forecasts point to another disappointing report, which the euro might not like. Nevertheless, the currency may suffer only minor damage as traders may wait for more evidence before they see a hard landing on the horizon.

ECB signals more rate hikes to come

EURUSD experienced its second fastest weekly rally in 2023 after ECB policymakers agreed that inflation may not return to the 2.0% target before 2025 and interest rates may need to keep rising beyond September. The central bank also highlighted that wage growth may remain double its historical average over the next two years, with investors immediately putting down their expectations for a July pause and lifting their terminal rate forecast to 4.0%.

In the eurozone, core inflation , which excludes volatile food and energy prices, has barely eased, being more than double the central bank’s 2.0% target. If that stays the case in the coming months, that would be enough evidence to support the aforementioned hawkish claim.

But the central bank’s attempts to slash inflation may not come without consequences. At some point, past rate increases could backfire as consumers gradually adjust to higher borrowing costs and the cost of living continues to bite.

Growth concerns have resurfaced lately, especially after the latest bank frenzy, but moved further into focus when German GDP data faced a downward revision, pushing the eurozone officially into a technical recession in the first quarter. The reaction in markets, though, was instant, with the euro recouping its losses immediately as the contraction was negligible, looking more like stagnation around -0.1% q/q. In addition, the unemployment rate is still near record lows, hardly resembling a shrinking economy.

Eurozone flash PMI estimates

Traders will next look at June’s S&P Global business PMI readings due on Friday to see whether the technical recession has worsened in the second quarter.

Although the contracting manufacturing sector has been the main drag on the economy, the spotlight might fall on the services sector this time. The services sector is the largest component of the EU’s economic growth, and therefore a key determinant of wage and inflation expectations as well. Investors forecast a weaker services PMI index at 54.5 from 55.1 previously. If estimates are correct, that would still be a decent number, pointing to an expansionary sector.

On the other hand, it would also be the second decline in a row, which could consequently feed some speculation that the economy is heading in the wrong direction. Nevertheless, investors would like to see a persisting decline in the data before they start worrying about a sharper economic downturn.

Price and wage PMI content could be important

Moreover, if the survey detects pressure for higher prices and wages, embracing the ECB’s hawkish guidance, the euro could easily find support in the wake of worse-than-expected PMI readings. Technically, if EUR/USD pulls below the current 1.0940-1.0920 resistance territory, it could next take a breather around 1.0860 or slightly lower at 1.0840, where the 20-day simple moving average (SMA) is currently positioned.

Meanwhile, the falling manufacturing PMI index is expected to stabilize at 44.8 for the second consecutive month, with the composite index likely inching down by 0.3 points to 52.5.

In the positive scenario, where the data arrive stronger-than-expected and businesses flag higher consumer prices as wage pressures mount, EUR/USD could spike up to 1.1000 and then attempt to breach the 1.1033-1.1050 key resistance zone with scope to meet April’s one year high of 1.1094.