27.10.202011:32 Forex Analysis & Reviews: EUR/USD: Europe's GDP will contract this 4th quarter. Yen is in demand again as investors are running away from risks amid another wave of COVID-19.

The expected deeper contraction of the Euro area's GDP in the 4th quarter, together with weak indicators on German confidence and economic expectations, as well as sharp surge in COVID-19 infections both in Europe and the United States, are keeping demand low for risky assets , and, accordingly, high on safe haven assets, particularly in the US dollar and Japanese yen. The yen has already rallied against most of the G10 currencies as investors are reluctant to take on new risks and are trying to avoid them amid rising incidence of COVID-19. At the same time, the lack of progress in negotiations over a new US stimulus package is keeping the US dollar attractive.

Earlier, European leaders have mentioned the likelihood of implementing new quarantine restrictions if COVID-19 incidence continues to rise in the Euro area. Since the pandemic continues to persist in many European states, plus given the fact that new restrictions will create more negative consequences in economic activity, the odds of seeing a deeper contraction in the Euro area's GDP in the 4th quarter has become higher.

Any new restriction will surely cause colossal damage to the service sector, especially since the second wave of COVID-19 is expected to be no less destructive than the first. Good thing though that the governments have already prepared strategies to overcome it without introducing tough quarantine measures that would bring down the global economy.

So, even if the Euro area's GDP face a terrible fate of dropping down, it would not be as low as the level it reached before. In addition, according to recent data, the sharp contraction in the services sector is offset by the improving figures in the manufacturing sector. However, it's worth remembering that before, the service sector also collapsed first, and afterwards it was followed by the manufacturing sector.

With regards to the services and manufacturing sectors, recent data show that the eurozone has seen an improvement in the manufacturing sector, however, it was offset by the sharp decline in the services sector. The IHS Market reports that manufacturing PMI rose from 53.7 points to 54.4 points in October, while the services PMI dropped from 48.0 points to 46.2 poins. A reading below 50 points indicates a contraction in activity. Economists had expected the manufacturing PMI to be 52.6 and the services sector to be 46.7.

As for the coronavirus pandemic, the World Health Organization has relayed that daily incidence of COVID-19 around the world has already reached 465 thousand, well above its previous figures.

Such prospects are very terrible for the European currency, although it did not lead yet to a sharp collapse in the market. Still, the bulls need to bring the quote above the resistance level of 1.1830, as only after that will it be possible for the pair to see an upward move towards the level of 1.1865. But if the demand for the euro continues to decline in the market, the quote will most likely drop to 1.1790, and a breakout from which will push the pair further down to 1.1760 and 1.1705.

About economic statistics, the US Department of Commerce published a report yesterday on the US primary housing market, which surprised traders because of its lower-than-expected data. Sales were revealed to have decreased by 3.5% in September, amounting to only 959,000 per year. The Economists had expected it to rise by 1% and amount to 1.02 million homes a year.

Meanwhile, economic activity in the area of the Dallas Fed continued to observe growth in its indicators, thus, its manufacturing index in October rose from 22.3 points to 25.5 points, while its business activity index increased to 19.8 points.

The index from the Chicago Fed, on the other hand, underwent a slowdown, dropping down from 1.11 points to only 0.27 points in September, while economists had expected it to be 0.73 points. The decline indicates the gradual decaying of economic growth in the area, on which if (or rather when) the index moves to the negative side, it will be an indication that growth is well below the trend.