- EUR/USD rebounds from 1.0825 despite weak preliminary Eurozone PMI.
- The ECB is expected to cut interest rates two times more by the year-end.
- Investors await the US core PCE inflation for fresh guidance on interest rates.
EUR/USD recovers the majority of intraday losses after correcting to near 1.0825 in Wednesday’s New York session. The major currency pair bounces back even though the preliminary Eurozone Hamburg Commercial ank (HCOB) Purchasing Managers’ Index (PMI) report for July showed that Composite numbers unexpectedly eased due to a slowdown in activities in the manufacturing as well as the service sectors.
The HCOB Composite PMI decreased to 50.1, just above the 50 threshold that separates expansion from contraction. Investors expected the Composite PMI to have expanded at a faster pace to 51.1 from the former release of 50.9. The HCOB Manufacturing PMI contracted to 45.6, while the Services PMI expanded at a slower pace of 51.9.
The comments from Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, on flash PMI indicated that weak demand in the Eurozone’s largest economy has weighed heavily on the manufacturing sector. De la Rubia said, “French service providers increased their business activity in July due to the preparation for the Olympic Games. In contrast, demand in the German manufacturing sector seems to have dragged down overall private sector output.”
The Eurozone’s weak economic activity is expected to boost expectations of more rate cuts by the European Central Bank (ECB). However, price data didn’t offer any relief to ECB policymakers. According to the preliminary PMI report, input prices in the services sector increased at a faster rate, and selling prices rose at a pace similar to the previous survey period.
Currently, traders see the ECB delivering two more rate cuts this year. Also, a few ECB officials see market expectations of two more rate cuts as appropriate.
Daily digest market movers: EUR/USD rebounds as US Dollar corrects
- EUR/USD rebounds to near 1.0850 as the US Dollar (USD) corrects. The US Dollar edges lower ahead of the preliminary S&P Global PMI data for July, which will be published at 13:45 GMT. Economists expect that the Manufacturing PMI expanded at a nominal pace to 51.7 from June’s reading of 51.6. The Services PMI, a measure of activities in the service sector, is estimated to have expanded at a slower pace of 54.4 from the prior release of 55.3.
- Meanwhile, the market sentiment remains downbeat amid expectations that Donald Trump will come victorious in the United States (US) presidential elections in November and the uncertainty ahead of the Personal Consumption Expenditures Price Index (PCE) data for June, which will be published on Friday.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls from a fresh weekly high of 104.50. Expectations for Trump’s return to power rose after an assassination attack on him. Meanwhile, Democrats have nominated Vice President Kamala Harris as leader to fight against Republicans.
- On the economic front, investors will keenly focus on the US core PCE inflation data as it would provide fresh cues about when the Federal Reserve (Fed) will start reducing interest rates. The report is expected to show that core PCE inflation, the Fed’s preferred inflation measure, decelerated to 2.5% from May’s figure of 2.6%, with the monthly figure growing steadily by 0.1%.
- The scenario in which price pressures decline expectedly or at a faster pace will boost expectations of early rate cuts by the Fed. On the contrary, stubborn figures would weaken rate-cut bets. According to the CME FedWatch tool, 30-day Federal Fund futures show the central bank will begin lowering its key borrowing rates from their current levels in the September meeting.
Technical Analysis: EUR/USD drops to near 20-day EMA
EUR/USD returns inside the Symmetrical Triangle formation on a daily timeframe after failing to hold the breakout. The major currency pair extends its downside below the 20-day Exponential Moving Average (EMA), which trades around 1.0840. The shared currency pair could slide further towards round-level supports near 1.0800 and 1.0700.
The 14-day Relative Strength Index (RSI) returns within the 40.00-60.00 range, suggesting the bullish momentum has faded.
On the upside, the round-level resistance at 1.0900 will be a key barrier for the Euro bulls.
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.
