After an impressive rally, the euro is falling for a second straight day. In the European session, EUR/USD is trading at 1.0739, down 0.86%.
German manufacturing falls, services rise
German PMIs were a mix in March. Let’s start with the good news. Business activity climbed to a 10-month high, as Services PMI rose to 53.9, versus 50.9 in February and 51.0 anticipated. Manufacturing was a different story, as the PMI slipped to 44.4, versus 46.3 in February and 47.0 anticipated. This was the lowest reading since May 2020. Manufacturing activity continues to decline, as companies remain cautious in the uncertain economic environment. The eurozone PMIs mirrored the German readings, indicating that business activity is driving economic growth as manufacturing continues to sputter.
The ECB took the plunge last week, delivering a 50 basis point hike despite the market turmoil due to the banking crisis. ECB President Lagarde had basically declared to the markets over the past few weeks that the ECB intended to raise rates by 50 bp, and had the ECB not carried through, it would have risked its credibility. The move also made sense as eurozone inflation came in at 8.5% in February, barely unchanged from the 8.6% gain a month earlier.
Lagarde seems intent on not getting trapped again with specific rate hike announcements and said this week that “with high uncertainty, it is even more important that the rate path is data-dependent”. She also noted that inflation is still high, which required a “robust strategy going forward”. Was that a hint at further rate hikes? The markets certainly thought so, as the euro jumped to a 5-week high after her comments. Earlier this week, Lagarde suggested that the recent market turmoil could actually help the ECB by lowering demand and thus reducing inflation.
EUR/USD technical
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EUR/USD 1.0778. Next is 1.0890.
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There is support at 1.0647 and 1.0535.
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