EUR/USD has fallen sharply to the 1.1100 region following weak preliminary euro zone purchasing managers’ index data for September. ECB policymakers appear increasingly concerned about persistent inflation. Markets expect the Fed to cut interest rates by 50 basis points for the second time in a row in November.
EUR/USD faced sharp selling pressure and fell to the key support area of 1.1100 during Monday’s North American session. The major currency pair weakened due to multiple headwinds, namely weak euro zone Purchasing Managers’ Index (PMI) data for September and a sharp recovery in the US Dollar (USD).
The euro zone’s composite PMI unexpectedly contracted to 49.0. Economists had expected overall economic activity to grow at a moderate pace to 50.6 from 51.0 in August. The sharp contraction in overall economic activity was mainly due to weakness in manufacturing and slowing expansion of activity in the services sector.
Commenting on the flash PMI data, Dr. Cyrus de la Rubia, chief economist at Hamburg Merkbank, said: “The euro area is heading towards stagnation. France, the euro area’s main economy, saw a temporary pick-up due to the Olympics effect, but its composite PMI in September fell by the most in 15 months. The index is now below the expansion threshold. Given the sharp decline in new orders and backlogs, it doesn’t take much imagination to predict a further weakening of the economy.”
Any further signs of weakness would increase market speculation that the European Central Bank (ECB) will cut interest rates for a third time in October. Meanwhile, the latest comments from ECB policymakers indicate they are more concerned that price pressures remain entrenched. ECB policymakers have stressed that they need more data to show a further slowdown in inflation. On Friday, ECB Vice President Luis de Guindos said he would like to see better data on inflation before cutting interest rates further. “We will have more information in December than we did in October,” Guindos said.
Daily Digest Market Trends: EUR/USD Falls as Weak Eurozone PMIs Weigh on Euro
EUR/USD has slumped as the US Dollar (USD) strengthens despite growing speculation that the Federal Reserve (Fed) will continue with a larger-than-usual 50 basis points (bps) interest rate cut at its November meeting, as it did last Wednesday, amid rising concerns over job growth. According to the CME FedWatch tool, the likelihood that the Fed will cut interest rates by 50 bps in November to 4.25%-4.50% has risen to 51.7% from 29.3% a week ago. Meanwhile, the latest Reuters survey of economists indicates that the Fed will cut the federal funds rate by 25 bps at each of its November and December monetary policy meetings. Meanwhile, Fed Governor Michelle Bowman released a statement on Friday explaining why she opposes the decision to start the policy easing cycle with a 50 bps rate cut. Bowman, who decided to start the rate cut process with a 25 basis points cut, said a bigger cut could stimulate overall demand, given that inflation pressures have yet to return to the bank’s 2% target. In U.S. economic data, the flash S&P Global Composite Purchasing Managers’ Index (PMI) for September came in at 54.4, down from the previous reading of 54.6. The report showed further weakness in the manufacturing PMI was offset by slightly stronger-than-expected service sector activity. Commenting on the data, Chris Williamson, chief business economist at S&P Global Market Intelligence, said, “The continued robust expansion in output implied by the September PMI is consistent with a healthy third-quarter GDP growth of 2.2% annualized. However, some warning lights are flashing in terms of the reliance on the service sector for growth, including continued weakness in manufacturing and a worrying decline in business confidence.”
Technical reasons why: EUR/USD falls to the 1.1100 area
EUR/USD dipped below 1.1100 during European trading hours. The short-term outlook for the currency pair is expected to find tentative support near the 20-day exponential moving average (EMA) at 1.1090.
The outlook for the major currency pairs is likely to remain firm until a breakout of the ascending channel chart pattern formed on the daily chart near the psychological support of 1.1000 holds.
The 14-day relative strength index (RSI) has fallen to 55, suggesting weakening momentum.
On the upside, resistance at the 1.1200 round level will act as a major obstacle for EUR bulls, as a decisive crossing above this will push the asset towards the July 2023 highs of 1.1276. On the downside, the psychological level of 1.1000 and the July 17 highs near 1.0950 will be key support zones.
Economic indicators
S&P Global Composite PMI
The S&P Global Composite Purchasing Managers’ Index (PMI) is released monthly and is a leading indicator of U.S. private business activity in the manufacturing and services industries. Data is derived from a survey of senior executives. Each response is weighted according to the size of the company and its contribution to the total manufacturing or services output of the subsector in which it is located. Survey responses reflect the change (if any) in the current month compared to the previous month and can predict trends in official data series such as Gross Domestic Product (GDP), industrial production, employment, and inflation. The index ranges from 0 to 100, with a level of 50.0 indicating no change from the previous month. A reading above 50 indicates a general expansion of the private economy and is a bullish sign for the U.S. dollar (USD). Meanwhile, a reading below 50 indicates a general decline in activity and is considered bearish for the USD.
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Final release: Monday, September 23, 2024 13:45 (Prel)
Frequency: Monthly
Actual: 54.4
Consensus: –
Previous: 54.6
Source: S&P Global
