- EUR/USD finds cushion near 1.0800 amid improvement in the Eurozone’s economic outlook.
- The ECB is set to start reducing interest rates from the June meeting.
- The US Dollar drops even though traders pare back Fed rate-cut bets.
EUR/USD seems well-supported above the round-level support of 1.0800 in Friday’s European session. The strength in the major currency pair is majorly driven by strong Eurozone preliminary Purchasing Managers Index (PMI) data for May. The strong Composite PMI has improved the Eurozone’s economic outlook, but the likelihood of the European Central Bank (ECB) lowering interest rates in the short term remains firm.
S&P Global reported on Thursday that the Composite PMI jumped to 52.3, beating the consensus of 52.0 and the former release of 51.7. The PMI data rose for the third consecutive month even though the ECB is maintaining a restrictive policy framework.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank (HCOB) – which also publishes the PMI data in collaboration with S&P Global – said: “This time, there is also some good news for the ECB as the rates of inflation for input and output prices in the services sector have softened compared to the month before. This will be supportive of the apparent stance of the ECB to cut rates at the meeting on June 6. However, the better inflation outlook will most probably not be enough for the central bank to announce that further rate cuts will follow suit.”
Meanwhile, deepening uncertainty over whether the ECB would reduce interest rates in the July meeting too is keeping the Euro firm. In Friday’s European session, ECB board member Isabel Schnabel advised that the centreal bank should be cautious over lowering interest rates quickly. Schnabel agreed that there is a noticeable decline in price pressures but some elements such as domestic and service inflation are still persistent.
Daily digest market movers: EUR/USD gains further as US Dollar comes under pressure
- EUR/USD holds the crucial support of 1.0800 as the US Dollar declines despite upbeat data from the United States and deepening uncertainty about when the Federal Reserve (Fed) will start reducing interest rates. The early PMI print by S&P Global for May showed that the Composite PMI also beat expectations in the US, exceeding the prior reading due to robust growth in both manufacturing and service activities.
- The US preliminary PMI numbers suggested that business activity rose at the fastest pace in just over two years after two months of slower growth, indicating that the economy is on track to post solid Gross Domestic Product (GDP) gain in the second quarter. Strong US PMI data has weakened market speculation that the Fed will start reducing interest rates from the September meeting.
- The CME FedWatch tool shows that the probability for rate cuts from their current levels in September has been reduced to 53% from 64% recorded a week ago. Meanwhile, hawkish guidance on interest rates by Fed policymakers has also weighed on rate-cut bets for September.
- On Thursday, Atlanta Fed Bank President Raphael Bostic said the central bank may need to wait for the rate-cut consideration amid upside risks to inflation despite a slowdown in price pressures in April’s Consumer Price Index (CPI) report, Reuters reported. In a virtual class session with Stanford University business school students, Bostic said prices of a few goods are increasing at a faster pace than what is required to bring inflation down to the 2% target. Bostic added that a strong job market gives him comfort in maintaining a restrictive stance on interest rates.
- In Friday’s session, investors will focus on the US Durable Goods Orders data for April, which will be published at 12:30 GMT. Fresh orders for Durable Goods are estimated to have declined by 0.8% after expanding 2.6% in March.
Technical Analysis: EUR/USD rises sharply from 1.0800
EUR/USD finds buying interest near the breakout region of the Symmetrical Triangle formed on the daily time frame around 1.0800. The near-term outlook of the shared currency pair remains firm as the 20-day and 50-day Exponential Moving Averages (EMAs) have delivered a bullish crossover around 1.0780.
The 14-period Relative Strength Index (RSI) has slipped into the 40.00-60.00, suggesting that the momentum, which was leaned toward the upside has faded for now.
The major currency pair is expected to recapture a two-month high around 1.0900. A decisive break above this level would drive the asset towards 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 further down.
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.
