EUR/USD weakens on unexpectedly sluggish Eurozone flash PMI
- EUR/USD falls to near 1.0830 as weak preliminary Eurozone PMI weighs on the Euro.
- The ECB is expected to cut interest rates two times more by the year-end.
- Investors await the US core PCE inflation for fresh guidance on interest rates.
EUR/USD weakens to near 1.0830 in Wednesday’s European session as the preliminary Eurozone Hamburg Commercial Bank (HCOB) Purchasing Managers’ Index (PMI) report for July showed that Composite numbers unexpectedly eased due to a slowdown in activities in the manufacturing as well as the service sectors.
The HCOB Composite PMI decreased to 50.1, just above the 50 threshold that separates expansion from contraction. Investors expected the Composite PMI to have expanded at a faster pace to 51.1 from the former release of 50.9. The HCOB Manufacturing PMI contracted to 45.6, while the Services PMI expanded at a slower pace of 51.9.
The comments from Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, on flash PMI indicated that weak demand in the Eurozone’s largest economy has weighed heavily on the manufacturing sector. De la Rubia said, “French service providers increased their business activity in July due to the preparation for the Olympic Games. In contrast, demand in the German manufacturing sector seems to have dragged down overall private sector output.”
The Eurozone’s weak economic activity is expected to boost expectations of more rate cuts by the European Central Bank (ECB). However, price data didn’t offer any relief to ECB policymakers. According to the preliminary PMI report, input prices in the services sector increased at a faster rate, and selling prices rose at a pace similar to the previous survey period.
Currently, traders see the ECB delivering two more rate cuts this year. Also, a few ECB officials see market expectations of two more rate cuts as appropriate.
Daily digest market movers: EUR/USD slides while US Dollar advance
- EUR/USD faces an intense sell-off and extends its downside to near 1.0830 as the US Dollar (USD) advances. The US Dollar moves higher amid risk aversion that Donald Trump will come victorious in the United States (US) presidential elections in November and the uncertainty ahead of the Personal Consumption Expenditures Price Index (PCE) data for June, which will be published on Friday.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posts a fresh weekly high at around 104.50. Expectations for Trump's return to power rose after an assassination attack on him. Meanwhile, Democrats have nominated Vice President Kamala Harris as leader to fight against Republicans.
- On the economic front, investors will keenly focus on the US core PCE inflation data as it would provide fresh cues about when the Federal Reserve (Fed) will start reducing interest rates. The report is expected to show that core PCE inflation, the Fed’s preferred inflation measure, decelerated to 2.5% from May’s figure of 2.6%, with monthly figure growing steadily by 0.1%.
- The scenario in which price pressures decline expectedly or at a faster pace will boost expectations of early rate cuts by the Fed. On the contrary, stubborn figures would weaken rate-cut bets. According to the CME FedWatch tool, 30-day Federal Fund futures show the central bank will begin lowering its key borrowing rates from their current levels in the September meeting.
- In Wednesday’s session, the US Dollar will be driven by the preliminary S&P Global PMI data for July, which will be published at 13:45 GMT. Economists expect that the Manufacturing PMI expanded at a nominal pace to 51.7 from June’s reading of 51.6. The Services PMI, a measure of activities in the service sector, is estimated to have expanded at a slower pace of 54.4 from the prior release of 55.3.
Technical Analysis: EUR/USD fails to hold Triangle breakout
EUR/USD returns inside the Symmetrical Triangle formation on a daily timeframe after failing to hold the breakout. The major currency pair extends its downside below the 20-day Exponential Moving Average (EMA), which trades around 1.0840. The shared currency pair could slide further towards round-level supports near 1.0800 and 1.0700.
The 14-day Relative Strength Index (RSI) returns within the 40.00-60.00 range, suggesting the bullish momentum has faded.
On the upside, the round-level resistance at 1.0900 will be a key barrier for the Euro bulls.
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.
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