Market Data 
- EUR/USD finds a floor and rebounds on the back of better-than-expected Manufacturing data for the Eurozone.
- The pair had been selling off after more positive data from the US.
- The data suggested the Federal Reserve could delay cutting interest rates, supporting USD.
- The ECB continues to target June as the first month to cut interest rates.
EUR/USD finds a floor in the lower 1.0700s after the release of better than expected Eurozone Manufacturing PMI data on Tuesday and recovers. The release of German inflation data, although lower than expected, did not impact the pair.
German Harmonized Index of Consumer Prices slowed to 2.2% YoY in March from 2.4% in February, which was below the 2.3% expected. Although the data reinforces the likelihood of the European Central Bank (ECB) going ahead with anticipated interest-rate cuts in June, it failed to move the needle on EUR/USD.
EUR/USD recovers on improvement in Eurozone Manufacturing
EUR/USD found a foothold after Eurozone HCOB Manufacturing PMI data showed a rise to 46.1 in March when economists had expected no-change from the 45.7 printed in February. That said, although it was higher than expected it is still not above the 50 which distinguishes growth from contraction, unlike US Manufacturing PMIs which rose above 50 for the first time since 2022.
The pair had weakened over the Easter weekend after more strong US macroeconomic data and hawkish commentary from the Federal Reserve (Fed) Chairman Jerome Powell, supported the US Dollar (USD), pushing down the probability of the US Federal Reserve (Fed) cutting interest rates by June to close to 50%. The maintenance of higher interest rates is good for the USD as it attracts more capital inflows.
In Europe, slower growth and lower inflation mean rate-setters at the European Central Bank (ECB) are not as cautious about cutting interest rates to help stimulate growth. This divergence of trajectories between both central banks is negative for EUR/USD.
EUR/USD declines as US data bears up
EUR/USD takes another step lower, breaching the key 1.0800 level over the Easter weekend, as some firm US data suggests the Fed will have to delay reducing interest rates as inflation is likely to remain stubbornly above target.
On Good Friday, the inflation metric favored by the Fed, the core Personal Consumption Expenditures Price Index (PCE) in February, came out at 2.8%, exactly as expected, if below the 2.9% of January. It showed price pressures remain buoyant and well above the Fed’s 2.0% target.
US Manufacturing data on Easter Monday was also overall quite positive, with the ISM Manufacturing PMI for March vaulting over 50 – the dividing line between expansion and contraction – from a previous level of 47.8. The result was well above expectations of a rise to 48.4. It was the first result denoting expansion in the US manufacturing sector since November 2022.
The Euro was kept under pressure, meanwhile, by another ECB rate setter joining the chorus line for a June rate cut. ECB Governing Council member and Austrian Central Bank Governor Robert Holzmann said that the ECB could cut interest rates before the Fed, and in regards to when, “will depend largely on what wage and price developments look like by June.”
Technical Analysis: EUR/USD continues pushing lower
EUR/USD extends the dominant short-term downtrend that started at the March 8 high. It is currently on its way down to key support at the 1.0694 year-to-date (YTD) lows.
Euro versus US Dollar: 4-hour chart
The pair is oversold according to the Relative Strength Index (RSI) momentum indicator. This is a signal for sellers not to add any more shorts to their positions. If the indicator rises out of oversold (above 30), it will be a signal to close all short positions and open longs. This could lead to a pullback, although the precedence of the downtrend suggests an eventual capitulation.
The 1.0694 February and YTD lows are likely to present substantial support and a bounce off that level is likely at the first test. A decisive break below, however, would usher in another bout of weakness, and target the 1.0650s.
A decisive break is one characterized by a long red down candle breaking cleanly through the level and closing near its low, or three consecutive red candles breaching the level.
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.
