EUR/USD falls below 1.0400 after disappointing US ISM

• EUR/USD tumbled more than 100 pips after US ISM disappointed forecasts, but remained in expansionary territory at 53.0
• The greenback was bolstered by a counter-cyclical move, meaning poor growth related data from the US could push the dollar higher.
• EU inflation topped 8.5% year-on-year, in line with figures from France, Spain and Germany.

The EUR/USD slumps at the start of the second half of 2022, breaking its way south below 1.0400, hitting a new two-week high amid growing concern shifting to economic growth, which now appears to be flat by aggressive tightening by global central banks. At the time of writing, the EUR/USD is trading at 1.0396.

US manufacturing ISM disappointed expectations, but the dollar rose

Sentiment remains gloomy, with global equities falling. Meanwhile, the US manufacturing PMI disappointed expectations and hit its lowest level in two years, as new orders contracted. The dollar, in a countercyclical move, rose after the report and hit a two-week high around 105,635, but pulled back a bit towards 105,490. EUR/USD extended its losses, despite a better-than-expected inflation report from the EU.

Timothy Fiore, chairman of the ISM Business Survey Committee, said growth in the manufacturing sector was “hindered by supply chain constraints.” Fiore added: “Price expansion eased slightly for the third consecutive month in June, but instability in global energy markets continues. Sentiment remained upbeat on demand, with three positive comments on growth per each cautious comment. Panelists continue to cite supply chain and pricing issues as their biggest concerns.”

Earlier during the European session, the euro zone reported June inflation, which rose 8.6% yoy, beating estimates, while core readings expanded 3.7% yoy, lower than expected. The previous report highlights the high inflationary pressures registered by France, Spain and Germany, although the decline in the basic figures offers a glimmer of hope that inflation may be close to its maximum.

Meanwhile, US Treasury yields are falling sharply as investors’ attention shifts to growth. Now that central banks are trying to control inflation, financial analysts are beginning to assess whether the US Federal Reserve will achieve a soft landing, that is, avoid a recession. From the bond market reaction, the fact that 2, 5 and 10 year yields have fallen by more than ten basis points illustrates that investors are expecting a less aggressive Fed, with money market futures expectations waiting for the first rate cut by the end of the third quarter of 2023.

Technical levels