EUR/USD dips below 1.1100 as Eurozone PMI surprisingly contracts

VaselineSeptember 23, 2024

0 5 minutes read

EUR/USD dips below 1.1100 as Eurozone PMI surprisingly contracts

EUR/USD dips sharply below 1.1100 on weak preliminary Eurozone PMI data for September.
ECB policymakers appear to be increasingly concerned that inflation remains persistent.
Markets expect the Fed to deliver a second consecutive 50 bps interest rate cut in November.

EUR/USD is facing strong selling pressure and is falling below the crucial 1.1100 support in the European session on Monday. The main currency pair weakens due to several headwinds: weak PMI (PMI) data from the Eurozone and a sharp recovery in the US dollar (USD).

Eurozone composite PMI surprisingly contracted to 49.0. Economists had expected activity in the overall economy to have grown at a slower pace to 50.6 from 51.0 in August. A sharp contraction in overall economic activity was driven mainly by weakness in the manufacturing sector and a slower expansion in service sector activity.

Commenting on the flash PMI data, Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said: “The euro area is heading for stagnation. After the Olympic effect temporarily boosted France, the eurozone’s heavy-hitting economy, the composite PMI fell in September by the most in 15 months. The index has now fallen below the expansion threshold. Given the rapid decline in new orders and backlog, it doesn’t take much imagination to foresee further weakening of the economy.

Signs of further weakness would increase market speculation for a third interest rate cut by the European Central Bank (ECB) in October. Meanwhile, recent comments from ECB policymakers indicated they are more concerned that price pressures remain persistent. ECB policymakers stressed the need for more data to point to a further slowdown in inflation. On Friday, ECB Vice President Luis de Guindos said he wanted to see more good data on inflation before cutting interest rates further. “We will have more information in December than in October,” Guindos said.

Daily Market Reasons: EUR/USD falls on more headwinds

EUR/USD falls sharply as the US dollar (USD) gains ground, despite growing speculation that the Federal Reserve (Fed) will continue to opt for a larger-than-usual 50 basis point interest rate cut (bps) in the November session as it delivered last Wednesday amid growing concerns about job growth. According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 50 bps to 4.25%-4.50% in November rose to 51.7% from 29.3% a week ago.
By contrast, the latest Reuters poll of economists shows the central bank will cut federal funds rates by 25 bps at each of its policy meetings in November and December.
Meanwhile, Fed Governor Michelle Bowman issued a statement on Friday explaining why she opposed the decision to start the policy easing cycle with a 50 basis point rate cut. Bowman, who voted to start the rate-cutting process with a 25 bps cut, said a bigger cut could fuel overall demand given that inflationary pressures have yet to return to the bank’s 2 percent target.
As for economic data from the United States (US), investors will focus on preliminary S&P Global Purchasing Managers’ (PMI) data for September due at 13:45 GMT. The report is expected to show that the PMI for manufacturing was higher at 48.5 than August’s print of 47.9, but remains below the 50.0 mark. In the same period, the services PMI is expected to decline to 55.2 from the previous reading of 55.7.

Technical analysis: EUR/USD drops vertically below 1.1100

EUR/USD dips below 1.1100 in European trading hours. The short-term outlook for the currency pair is expected to find interim support near the 20-day exponential moving average (EMA) near 1.1090.

The outlook for the major currency pairs would remain firm until it holds the breakout of the Rising Channel chart formed on a daily time frame near the psychological support of 1.1000.

14-day Relative Strength Index (RSI) dips to 55, suggesting momentum is weakening

Looking to the upside, the resistance at the round level of 1.1200 will act as a major barricade for the Euro bulls. A decisive break above the same level would take the asset to the July 2023 high of 1.1276. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support areas.

Frequently asked questions about the euro

Euro is the currency for the 20 countries of the European Union that belong to the Eurozone. It is the second most heavily traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, representing an estimated 30% discount on all trades, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany is the reserve bank for the euro area. The ECB sets interest rates and manages monetary policy. The ECB’s main mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its main tool is raising or lowering interest rates. Relatively high interest rates – or the expectation of higher rates – will usually 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 taken by the heads of national banks in the euro area and six permanent members, including ECB President Christine Lagarde.

Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric element for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its peers will typically 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 have an impact on the euro. Indicators such as GDP, manufacturing and services PMI, employment and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the euro. Not only does it attract more foreign investment, it may encourage the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if the economic data is weak, the euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are particularly significant as they account for 75% of the euro area economy.

Another important piece of information 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 in a given period. If a country produces highly sought-after exports, then its currency will only gain in value from the additional demand created by foreign buyers wanting to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

VaselineSeptember 23, 2024

0 5 minutes read

Daily Market Reasons: EUR/USD falls on more headwinds

Technical analysis: EUR/USD drops vertically below 1.1100

Frequently asked questions about the euro

Vaseline

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