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EUR/USD recovers on encouraging Eurozone PMIs and USD weakness

  • EUR/USD rebounds from 1.0800 as preliminary Eurozone Composite PMI for May beats estimates.
  • The ECB is expected to cut interest rates three times by the end of the year.
  • The US dollar retreats on the prospects of a Fed rate cut in September.

In the European session on Thursday, the EUR/USD pair made a new weekly low near the 1.0800 support. EUR/USD takes advantage of the falling US Dollar and strong preliminary Eurozone PMI numbers for May.

The US Dollar Index (DXY), which measures the value of the US dollar against six major currencies, falls to 104.77 as the recovery move appears to stall just below the crucial resistance of 105.00. The recovery movement of the US dollar also moderated as investors remain confident that the Federal Reserve (Fed) will begin to reduce interest rates from the September meeting.

Traders did not trim bets supporting a Fed rate cut in September, despite hawkish comments on the interest rate outlook from Fed officials, indicated by the Minutes of the Federal Open Market Committee (FOMC) from the May meeting published on Wednesday.

The impact of the FOMC Minutes was expected to be temporary on the US Dollar, as officials were concerned about stalling progress in the disinflation process based on three rising inflation readings from the January-March period. While strong investor speculation about rate cuts in September is based on an expected decline in inflation data indicated by the April Consumer Price Index (CPI) report.

Daily Market Moves Summary: EUR/USD Benefits from Good Preliminary Eurozone PMI Data

  • EUR/USD is recovering strongly as S&P Global has released 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 estimates of 46.2 and the previous reading of 45.7. However, a figure below the 50.0 threshold is considered a contraction. The composite PMI jumps to 52.3, beating the consensus of 52.0 and the previous release of 51.7. The services PMI, which represents the tertiary sector, grew steadily at 53.3, but fell short of expectations of 53.5.
  • Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank (HCB) commented on the preliminary PMI data: “We are going in the right direction. Taking into account the PMI figures in our current GDP forecast, the Eurozone will grow probably at a rate of 0.3% during the second quarter, leaving aside the specter of recession. Growth is mainly driven by the services sector, whose expansion lasted four months. The manufacturing sector acts less and less as a stumbling block for the economy. economy and optimism about future production has increased even further in this sector. With all this, it seems plausible that GDP growth close to 1% can be achieved this year, and there is even some upward risk.
  • Looking ahead, the Euro will be guided by market expectations of the European Central Bank (ECB) reducing interest rates at its July meeting. The ECB is expected to begin lowering interest rates from the June meeting. Therefore, investors remain uncertain about further rate cuts by the ECB.
  • Many ECB policymakers want to remain data-dependent when it comes to further lowering rates in July, as aggressive monetary policy easing could reignite price pressures. Furthermore, ECB policymakers are concerned that subsequent rate cuts could affect the balance between monetary stimulus, inflation and other financial triggers.
  • For the year as a whole, financial markets expect the ECB to cut interest rates three times. Leading financial services provider UBS said that under its baseline scenario, following the initial cut in June, the ECB could embark on a prolonged and incremental sequence of rate cuts. They would consist of cuts of 25 basis points each quarter, leading to a total decline of 75 basis points in 2024 and another 100 basis points in 2025.

Technical Analysis: EUR/USD revives after testing triangle breakout zone

EUR/USD rebounds strongly after testing the breakout region of the symmetrical triangle formed on the daily time frame. The short-term outlook for the pair remains firm as the 20-day and 50-day EMA have crossed to the upside around 1.0780.

The 14-period RSI has moved comfortably within the bullish range of 60.00-80.00, suggesting that momentum has tilted to the upside.

The major currency pair is expected to reclaim the two-month high around 1.0900. A decisive break above it will push the pair towards the March 21 high around 1.0950 and the psychological resistance of 1.1000. However, a downside move below the 200-day EMA at 1.0800 could push it into the forest.

The euro

The Euro is the currency of the 20 countries of the European Union that belong to the euro zone. It is the second most traded currency in the world, behind the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of more than $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2% ).

The European Central Bank (ECB), headquartered in Frankfurt, Germany, is the reserve bank of the euro zone. The ECB sets interest rates and manages monetary policy The ECB's main mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main instrument is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher rates – tend to benefit the Euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone's national banks and six permanent members, including ECB President Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), are an important econometric data for the euro. If inflation rises more than expected, especially if it exceeds the 2% target set by the ECB, it is forced to raise interest rates to bring it back under control. Relatively high interest rates compared to their peers tend to benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases measure the health of the economy and can influence the Euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can 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 raise interest rates, which will directly strengthen the Euro. Conversely, if economic data is weak, the Euro is likely to fall. The economic data for the four largest economies in the eurozone (Germany, France, Italy and Spain) are especially significant, as they represent 75% of the eurozone economy.

Another important 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 during a given period. If a country produces highly sought-after export products, its currency will appreciate due to the additional demand created by foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

Source: Fx Street

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