EUR/USD: On the defensive ahead of German and Eurozone preliminary PMIs

• EUR/USD is looking south with a flag breakdown on the technical charts.
• Weak German PMI would underscore the need for fresh ECB stimulus.

EUR/USD closed well below 1.1204 on Tuesday, confirming a bear flag breakdown, a continuation pattern which often accelerates the preceding bearish move.

The breakdown has created a room for a drop to fresh 2019 lows below 1.1107 (May 23 low). Put simply, the common currency is on the defensive ahead of the release of the key preliminary data releases across Europe.

The preliminary German purchasing managers' index (PMI), scheduled for release at 07:30 GMT, is expected to show the manufacturing activity contracted for the seventh straight month in July.

The Eurozone PMI is also forecasted to remain unchanged at 47.6, i.e. in contraction territory (below 50).

The EUR could drop to 1.1107, as suggested by the flag breakdown, if the German PMI matches or prints well below estimates, bolstering the case for a European Central Bank rate cut.

Currently, markets are pricing a 10 basis point deposit rate cut in September. Also, many, including Fitch Ratings, believe the central bank would restart its quantitative easing program in the near future.

The ECB is expected to keep rates unchanged on Thursday and send out a strong dovish signal, setting the stage for a rate cut in September.

All-in-all the path of least resistance for the EUR is to the downside and a big beat on both the German and Eurozone PMIs is needed to put a floor under the common currency ahead of Thursday's ECB rate decision.

As of writing, EUR/USD is trading at 1.1144, the lowest level since May 31.

Technical levels