- EUR/USD bounces back from 1.0800 as preliminary Eurozone Composite PMI for May beats estimates.
- The ECB is anticipated to reduce interest rates three times by the year-end.
- The US Dollar edges down on firm Fed rate-cut prospects for September.
EUR/USD witnesses a stellar buying interest after posting a fresh weekly low near the crucial support of 1.0800 in Thursday’s American session. The major currency pair capitalizes on a decline in the US Dollar and strong Eurozone preliminary PMI numbers for May.
The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, edges down to 104.77 as the recovery move seems stalling just below the crucial resistance of 105.00. The recovery move in the US Dollar seems fading as investors remain confident that the Federal Reserve (Fed) will start reducing interest rates from the September meeting.
Traders didn’t pare bets supporting Fed rate cuts in September despite hawkish commentary on the interest rate outlook by Fed officials indicated by the Federal Open Market Committee (FOMC) minutes for the May meeting released on Wednesday.
The impact of the FOMC minutes was expected to be temporary on the US Dollar as officials were worried about stalling progress in the disinflation process on the basis of three hot inflation readings of the January-March period. While investors’ firm speculation on rate cuts in September is built on an expected decline in the inflation data indicated by the Consumer Price Index (CPI) report of April.
Meanwhile, the US Department of Labor has reported that the number of individuals claiming jobless benefits for the first time was lower than expected in the week ending May 17. Initial Jobless Claims were recorded at 215K, fewer than the consensus of 220K and the prior reading of 223K, upwardly revised from 222 K.
Daily digest market movers: EUR/USD rises further on firm Eurozone PMI data
- EUR/USD recovers sharply as the S&P Global has published strong preliminary Purchasing Managers Index (PMI) data for May. The agency reported that the Manufacturing PMI rose at a faster pace to 47.4, from the estimates of 46.2 and the prior reading of 45.7. However, a figure below the 50.0 threshold is considered as contraction. The Composite PMI jumps to 52.3, beats the consensus of 52.0 and the former release of 51.7. The Services PMI that represents the service sector grew steadily by 53.3 but missed expectations of 53.5.
- Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank (HCB) commented on flash PMI data, “We are heading in the right direction. Considering the PMI numbers in our GDP nowcast, the Eurozone will probably grow at a rate of 0.3% during the second quarter, putting aside the spectre of recession. Growth is mainly driven by the service sector whose expansion was extended to four months. Manufacturing acts less and less as a stumbling block for the economy and optimism about future output has increased further in this sector. With all this in place it seems plausible that GDP growth of almost 1% could be reached this year, and there is even some upward risk.
- Going forward, the Euro will be guided by market expectations about the European Central Bank (ECB) reducing interest rates in the July meeting. The ECB is widely anticipated to start lowering key borrowing rate from the June meeting. Therefore, investors remain uncertain over subsequent rate cuts by the ECB.
- Many ECB policymakers want to remain data-dependent for follow-up rate-cut move in July as an aggressive monetary policy easing could revamp price pressures again. Also, ECB policymakers worry that follow-up rate cuts could impact the balance between monetary stimulus, inflation and other financial triggers.
- For the full year, financial markets anticipate that the ECB will cut interest rates three times. Leading financial services provider UBS said that according to their baseline scenario, after the initial cut in June, the ECB may embark on a prolonged and incremental sequence of rate reductions. These would consist of 25 basis point cuts each quarter, leading to a total decrease of 75 basis points in 2024 and an additional 100 basis points in 2025.
Technical Analysis: EUR/USD finds strong buying interest near triangle breakout region
EUR/USD bounces back strongly after testing the breakout region of the Symmetrical Triangle formed on a daily timeframe. The near-term outlook of the shared currency pair remains firm as the 20-and 50-day Exponential Moving Averages (EMAs) have delivered a bullish crossover around 1.0780.
The 14-period Relative Strength Index (RSI) has shifted comfortably into the bullish range of 60.00-80.00, suggesting that the momentum has leaned toward the upside.
The major currency pair is expected to recapture two-month high around 1.0900. A decisive break above the same will drive the asset towards March 21 high around 1.0950 and the psychological resistance of 1.1000. However, a downside move by the major below the 200-day EMA at 1.0800 could push it inside the woods.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
