EUR/USD delivers V-shape recovery as upbeat Eurozone PMI, subdued US Dollar

Source Fxstreet
May 23, 2024 08:53
  • EUR/USD bounces back from 1.0800 as preliminary Eurozone Composite PMI for May beats estimates.
  • The ECB is anticipated to reduce interest rates three times by the year-end.
  • The US Dollar edges down on firm Fed rate-cut prospects for September.

EUR/USD witnesses a stellar buying interest after posting a fresh weekly low near the crucial support of 1.0800 in Thursday’s European session. The major currency pair capitalizes on a decline in the US Dollar and strong Eurozone preliminary PMI numbers for May.

The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, edges down to 104.77 as the recovery move seems stalling just below the crucial resistance of 105.00. The recovery move in the US Dollar seems fading as investors remain confident that the Federal Reserve (Fed) will start reducing interest rates from the September meeting.

Traders didn’t pare bets supporting Fed rate cuts in September despite hawkish commentary on the interest rate outlook by Fed officials indicated by the Federal Open Market Committee (FOMC) minutes for the May meeting released on Wednesday.

The impact of the FOMC minutes was expected to be temporary on the US Dollar as officials were worried about stalling progress in the disinflation process on the basis of three hot inflation readings of the January-March period. While investors’ firm speculation on rate cuts in September is built on an expected decline in the inflation data indicated by the Consumer Price Index (CPI) report of April.

Daily digest market movers: EUR/USD capitalizes on strong preliminary Eurozone PMI

  • EUR/USD recovers sharply as the S&P Global has published strong preliminary Purchasing Managers Index (PMI) data for May. The agency reported that the Manufacturing PMI rose at a faster pace to 47.4, from the estimates of 46.2 and the prior reading of 45.7. However, a figure below the 50.0 threshold is considered as contraction. The Composite PMI jumps to 52.3, beats the consensus of 52.0 and the former release of 51.7. The Services PMI that represents the service sector grew steadily by 53.3 but missed expectations of 53.5.
  • Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank (HCB) commented on flash PMI data, “We are heading in the right direction. Considering the PMI numbers in our GDP nowcast, the Eurozone will probably grow at a rate of 0.3% during the second quarter, putting aside the spectre of recession. Growth is mainly driven by the service sector whose expansion was extended to four months. Manufacturing acts less and less as a stumbling block for the economy and optimism about future output has increased further in this sector. With all this in place it seems plausible that GDP growth of almost 1% could be reached this year, and there is even some upward risk.
  • Going forward, the Euro will be guided by market expectations about the European Central Bank (ECB) reducing interest rates in the July meeting. The ECB is widely anticipated to start lowering key borrowing rate from the June meeting. Therefore, investors remain uncertain over subsequent rate cuts by the ECB.
  • Many ECB policymakers want to remain data-dependent for follow-up rate-cut move in July as an aggressive monetary policy easing could revamp price pressures again. Also, ECB policymakers worry that follow-up rate cuts could impact the balance between monetary stimulus, inflation and other financial triggers.
  • For the full year, financial markets anticipate that the ECB will cut interest rates three times. Leading financial services provider UBS said that according to their baseline scenario, after the initial cut in June, the ECB may embark on a prolonged and incremental sequence of rate reductions. These would consist of 25 basis point cuts each quarter, leading to a total decrease of 75 basis points in 2024 and an additional 100 basis points in 2025.

Technical Analysis: EUR/USD revives after testing triangle breakout region

EUR/USD bounces back strongly after testing the breakout region of the Symmetrical Triangle formed on a daily timeframe. The near-term outlook of the shared currency pair remains firm as the 20-and 50-day Exponential Moving Averages (EMAs) have delivered a bullish crossover around 1.0780.

The 14-period Relative Strength Index (RSI) has shifted comfortably into the bullish range of 60.00-80.00, suggesting that the momentum has leaned toward the upside.

The major currency pair is expected to recapture two-month high around 1.0900. A decisive break above the same will drive the asset towards March 21 high around 1.0950 and the psychological resistance of 1.1000. However, a downside move by the major below the 200-day EMA at 1.0800 could push it inside the woods.

Euro FAQs

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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