- EUR/USD falls sharply below 1.1100 on weak Eurozone preliminary Purchasing Managers’ Index data of September.
- ECB policymakers appear to be increasingly concerned about inflation remaining persistent.
- Markets expect the Fed to deliver a second consecutive 50 bps interest-rate cut in November.
EUR/USD faces sharp selling pressure and falls below the crucial support of 1.1100 in Monday’s European session. The major currency pair weakens on multiple headwinds: poor Eurozone Purchasing Managers’ Index (PMI) data for September and a sharp recovery in the US Dollar (USD).
The Eurozone Composite PMI surprisingly contracted to 49.0. Economists expected that activities in the overall economy to have grown at a slower pace to 50.6 from 51.0 in August. A sharp contraction in the overall economic activity was majorly driven by weakness in the manufacturing sector and a slower expansion in the service sector activity.
Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said, “The eurozone is heading towards stagnation. After the Olympic effect had temporarily boosted France, the eurozone heavyweight economy, the Composite PMI fell in September to the largest extent in 15 months. The index has now dipped below the expansionary threshold. Considering the rapid decline in new orders and the order backlog, it doesn’t take much imagination to foresee a further weakening of the economy.
Signs of further weakness would increase market speculation for a third interest rate cut by the European Central Bank (ECB) in October. Meanwhile, the latest comments from ECB policymakers have indicated that they are more concerned about price pressures remaining persistent. ECB policymakers have emphasized the need for more data pointing to a further slowdown in inflation. On Friday, ECB Vice President Luis de Guindos said that he wants to see more good inflation data before slicing interest rates further. “We will have more information in December than in October,” Guindos said.
Daily digest market movers: EUR/USD falls on multiple headwinds
- EUR/USD drops sharply as the US Dollar (USD) gains ground despite growing speculation that the Federal Reserve (Fed) will continue to opt for a larger-than-usual 50 basis points (bps) interest rate cut in the November meeting, as it delivered last Wednesday, amid growing concerns over job growth. According to the CME FedWatch tool, the likelihood of the Fed reducing interest rates by 50 bps to 4.25%-4.50% in November has increased to 51.7% from 29.3% a week ago.
- On the contrary, the latest Reuters poll to economists shows that the central bank will cut the federal fund rates by 25 bps in each of the monetary policy meetings to be held in November and December.
- Meanwhile, Fed Governor Michelle Bowman issued a statement on Friday explaining why she was against the decision to begin the policy-easing cycle with a 50-bps rate cut. Bowman, which voted to kick off the rate-cut process with a 25 bps cut, said a larger reduction could stoke overall demand given that inflationary pressures have yet not returned to the bank’s target of 2%.
- On the United States (US) economic data front, investors will focus on the preliminary S&P Global Purchasing Managers’ Index (PMI) data for September, which will be published at 13:45 GMT. The report is expected to show that the Manufacturing PMI came in higher at 48.5 than August’s print of 47.9 but remains below the 50.0 threshold. In the same period, the services PMI is estimated to decline to 55.2 from the former reading of 55.7.
Technical Analysis: EUR/USD drops vertically below 1.1100
EUR/USD dips below 1.1100 in European trading hours. The near-term outlook of the currency pair is expected to find interim support near the 20-day Exponential Moving Average (EMA) near 1.1090.
The outlook of the major currency pair would remain firm till it hold the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological support of 1.1000.
The 14-day Relative Strength Index (RSI) moves lower to 55, suggesting momentum is weakening
Looking up, the round-level resistance of 1.1200 will act as a major barricade for the Euro bulls. A decisive break above the same would drive the asset toward 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 major support zones.
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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