EUR/USD trades cautiously as weak Eurozone PMI boosts ECB rate cut bets

• EUR/USD looks vulnerable near 1.1100 based on Eurozone flash PMI data for September.
• Market participants expect the Fed to further cut interest rates by 50 bps in November.
• Investors shift focus to US PCE inflation data for August.

EUR/USD is struggling to hold key 1.1100 support in Tuesday’s European session after a sharp move lower on Monday. The major currency pair remains under pressure as Monday’s flash HCOB Purchasing Managers Index (PMI) data for September fueled market expectations that the European Central Bank (ECB) will opt for a second consecutive interest rate cut at its October meeting.

The PMI report showed that business activity unexpectedly dipped into contraction, which was expected to ease slightly, but remained above the 50.0 mark that separates expansion from contraction.

A decline in the HCOB composite PMI came mainly from the manufacturing sector, where the contraction in activities accelerated at a faster pace than expected. The services sector remained on a growth trajectory, but at a slower pace than economists had forecast.

Weakening the outlook for eurozone activity would add to the hurdles for ECB policymakers in their quest for stable market conditions, who are already worried about lingering price pressures. Last week, Isabel Schnabel, a member of the ECB’s Governing Council, said that steady inflation in services was keeping headline inflation high.

In today’s session, Deutsche Bundesbank President Joachim Nagel is scheduled to deliver a speech at 16:00 GMT. Nagel is expected to provide fresh clues about the ECB’s likely interest rate action for the rest of the year.

Daily market reasons: EUR/USD slips as US dollar maintains recovery

• EUR/USD remains under pressure as the US dollar (USD) gains ground following the release of mixed preliminary United States (US) S&P Global PMI data for September. The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is struggling to trade confidently above 101.00.
• The US S&P Global Composite PMI edged down slightly to 54.4 from August’s final reading of 54.6, as manufacturing activity unexpectedly fell further. The US S&P Global Services PMI expanded at a faster-than-expected pace of 55.4, but was down from the previous reading of 55.7. The agency noted that “Business sentiment, demand, hiring and investment are weakened by the uncertainty surrounding the presidential election, casting a shadow over the outlook for the year ahead at many firms.”
• Going forward, the outlook for the US dollar could remain uncertain as traders hold bets that support more big rate cuts from the Federal Reserve (Fed) at its November meeting. Financial market participants expect the Fed to opt for a 50 basis point (bps) interest rate cut for the second time in a row at its November meeting, amid growing concerns about deteriorating growth in work.
• “The Federal Reserve will cut rates by another 50 basis points in November, a decision that will depend heavily on incoming data, particularly the next monthly jobs report,” according to strategists at Citi.
• On the economic front, investors will focus on the August Personal Consumption Expenditure (PCE) Price Index, which will be released on Friday. Signs that price pressures remain persistent would dent market expectations for a 50 bps Fed rate cut. On the contrary, the soft numbers would suggest the same.

Technical Analysis: EUR/USD is trading near the 20-day EMA

EUR/USD is nearing 1.1100 in European trading hours on Tuesday. The major currency pair is finding support near the 20-day exponential moving average (EMA) near 1.1090.

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

The 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 lead the pair 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.