EUR/USD recovers from intraday lows after weak US ISM PMI
- EUR/USD stages a rebound after weak US ISM Manufacturing PMI data weighs on the Dollar.
- Policy divergence between the Fed and ECB continues to favour the Euro.
- Focus turns to upcoming US and Eurozone data releases, with attention on Nonfarm Payrolls.
The Euro (EUR) trims part of its earlier losses against the US Dollar (USD) on Monday after weaker-than-expected US ISM Manufacturing Purchasing Managers Index (PMI) data weighs on the Greenback. At the time of writing, EUR/USD trades around 1.1706, rebounding from an intraday low near 1.1659.
The ISM Manufacturing PMI remained in contraction territory in December at 47.9, below the market forecast of 48.3 and edging lower from November’s 48.2 reading. The ISM Manufacturing Prices Paid Index stood at 58.5, unchanged from last month and below expectations of 59.0.
Within the report, the ISM Manufacturing Employment Index rose to 44.9 in December from 44.0 in November, remaining in contraction territory. The New Orders Index contracted for a fourth straight month in December after one month of growth, edging up to 47.7 from 47.4.
The weaker survey results weighed on the US Dollar, trimming its earlier gains after an initial advance driven by safe-haven demand. The Greenback had found early support following the US military operation in Venezuela over the weekend, which led to the capture of Venezuelan President Nicolas Maduro.
On the monetary policy front, diverging outlooks between the Federal Reserve (Fed) and the European Central Bank (ECB) keep EUR/USD tilted to the upside. Markets continue to expect the Fed to remain on an easing path, with investors pricing in two interest rate cuts in 2026. In contrast, the ECB is seen holding rates steady amid resilient growth and inflation near target.
Looking ahead, traders turn their attention to a busy economic calendar on both sides of the Atlantic. In the United States, S&P Global Composite and Services PMIs are due on Tuesday, followed by the ADP Employment Change, the ISM Services PMI, and the JOLTS Job Openings report on Wednesday. Weekly Initial Jobless Claims are scheduled for Thursday, ahead of the closely watched Nonfarm Payrolls (NFP) report on Friday.
In the Eurozone, HCOB Composite and Services PMIs are released on Tuesday, with the preliminary Core Harmonized Index of Consumer Prices (HICP) due on Wednesday. On Thursday, focus turns to Consumer Confidence, the Unemployment Rate, the Economic Sentiment Indicator, and the Producer Price Index (PPI).
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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