EUR/USD appears to be weakening near the 1.1100 level following weak Eurozone PMI flash readings for September. Market participants expect the Fed to cut interest rates by another 50 basis points in November. Investors are now turning their attention to the US PCE inflation data for August.
EUR/USD is struggling to hold the key support at 1.1100 in Tuesday’s European session after Monday’s sharp sell-off. The major currency pair remains under pressure as Monday’s flash HCOB Purchasing Managers’ Index (PMI) for September stoked market expectations that the European Central Bank (ECB) will opt for a second consecutive interest rate cut at its October meeting.
The PMI report showed business activity unexpectedly contracted, staying above the 50.0 threshold that separates expansion from contraction, although a slight decline had been expected.
The decline in the HCOB composite PMI was driven mainly by the manufacturing sector, where the contraction in activity accelerated at a faster pace than expected, while the services sector maintained its growth trajectory but at a slower pace than economists had expected.
The weakening outlook for euro zone economic activity will pose a further obstacle in the pursuit of stable market conditions for ECB policymakers, who are already concerned about lingering price pressures. Last week, ECB Governing Council member Isabel Schnabel said that solid services inflation was keeping headline inflation high.
Today’s session will see Bundesbank President Joachim Nagel speak at 16:00 GMT. He is expected to give further hints about the ECB’s interest rate movements for the rest of the year.
Daily Digest Market Trends: EUR/USD drops slightly as US Dollar maintains recovery
EUR/USD remains under pressure as the US dollar strengthens following mixed US S&P Global PMI flash readings for September. The US Dollar Index (DXY), which tracks the value of the US dollar against six major currencies, is trying to trade stably above 101.00. The US S&P Global Composite PMI edged down to 54.4 from August’s closing reading of 54.6 as manufacturing activity unexpectedly weakened further. The US S&P Global Services PMI expanded to 55.4, better than expected, but down slightly from the previous reading of 55.7. “Uncertainty surrounding the presidential election is holding back business sentiment, demand, employment and investment, clouding many companies’ outlook for the year ahead,” the agency said. Going forward, the outlook for the US dollar may remain unclear as traders remain of the view that the Federal Reserve will make another significant interest rate cut at its November meeting. Financial market participants expect the Fed to opt for a second consecutive 50 basis points (bps) rate cut at its November meeting amid growing concerns over deteriorating job growth. Citi strategists said, “The Fed will cut rates by another 50 bps in November, but the decision will depend primarily on upcoming data, including the next monthly employment report.” On the economic data front, investors will be keeping an eye on the August Personal Consumption Expenditures Price Index (PCE), due for release on Friday. Signs that price pressures remain persistent will weigh on market expectations that the Fed will cut rates by 50 bps. Conversely, a weak reading will encourage a similar move.
Technical analysis: EUR/USD is trading close to the 20-day EMA
EUR/USD is trading near the 1.1100 level during European trading hours on Tuesday. The major currency pair is finding 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 the breakout of the ascending channel chart pattern formed on the daily chart near the psychological level of 1.1000 is sustained.
The 14-day relative strength index (RSI) has fallen to 55, suggesting weakening momentum.
On the upside, resistance at the round level of 1.1200 will act as a major obstacle for EUR bulls, as a decisive crossing above it will send the pair towards the July 2023 high of 1.1276. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be key support zones.
Frequently asked questions about the Euro
The Euro is the currency of 20 European Union countries that belong to the Eurozone. It is the second most traded currency in the world after the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of over $2.2 trillion. EUR/USD is the most traded currency pair in the world, accounting for approximately 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mission is to maintain price stability, which means either keeping inflation down or stimulating growth. The ECB’s main tool is to raise or lower interest rates. Relatively higher interest rates, or the expectation of rising interest rates, typically benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight meetings per year. Decisions are made by the heads of the eurozone national banks and the six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric input for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s target of 2%, the ECB will be forced to raise interest rates to keep inflation in check. Relatively high interest rates compared to other countries usually benefit the euro, as they make the eurozone a more attractive place for global investors to park their funds.
Data released measures the health of the economy and can affect 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, it can also trigger the ECB to raise interest rates, which directly strengthens the euro. On the other hand, weak economic data can cause the euro to weaken. Economic data from the eurozone’s four largest economies (Germany, France, Italy, and Spain) is particularly important as they account for 75% of the eurozone’s economy.
Another important piece of data about the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces exports that are in high demand, its currency will only increase in value due to the additional demand it generates from foreign buyers looking to purchase these goods. So a positive trade balance makes a currency stronger, and a negative one makes it stronger.
