EUR/USD declines below 1.0700 due to divergent Eurozone/US PMI performance
- EUR/USD drops sharply to 1.0670 on divergence in US/Eurozone preliminary PMI performance.
- ECB's Klaas Knot sees one or two more rate cuts this year.
- The US Dollar strengthens amid firm expectations of widening policy divergence between the Fed and other central banks.
EUR/USD faces intense selling pressure in Friday’s New York session due to multiple headwinds. The major currency pair declines to a six-week low near 1.0670 as the Euro weakens after downbeat Eurozone’s preliminary PMIs data that suggested the economy is losing momentum.
The HCOB PMI report, produced by S&P Global, shows that the Composite PMI unexpectedly declined to 50.8 in June from the prior release of 52.2 but managed to hold above the 50.0 threshold that separates expansion from contraction. Investors expected the Composite PMI to increase to 52.5. The Manufacturing PMI fell further into contraction territory while the Service PMI continued to suggest expansion, although at a slower pace than the previous month.
“New orders decreased for the first time in four months, feeding through to softer expansions in business activity and employment. Meanwhile, business confidence dipped to the lowest since February,” the report said.
Meanwhile, political uncertainty in France, the Eurozone’s second-largest economy, has been keeping the Euro on the back foot. Investors worry that the formation of Marine Le Pen 's-led-National Rally’s (RN) government after legislative elections would trigger financial woes in France. The RN has promised a lower retirement age, energy price cuts, more public spending, and "France first" economic policies in its manifesto.
On the monetary policy front, investors evaluate how many times the European Central Bank (ECB) will cut interest rates again this year. ECB Governing Council member and President of De Nederlandsche Bank Klaas Knot said on Thursday that he is comfortable with market expectations of one or two more rate cuts this year. The ECB cut interest rates for the first time in seven years at its June meeting.
Daily digest market movers: EUR/USD slides further as Fed maintains hawkish stance
- EUR/USD weakens as the US Dollar extends upside after the preliminary US S&P Global PMIs report for June shows that manufacturing and service activities surprisingly rose. The Composite PMI jumps to 51.7. However, economists expected them to have declined to 51.0 from the prior release of 51.3. "The early PMI data signal the fastest economic expansion for over two years in June, hinting at an encouragingly robust end to the second quarter while at the same time, inflation pressures have cooled," the report said.
- The US Dollar was already firm due to the increasing policy divergence between the Federal Reserve (Fed) with other central banks from G7 nations. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises to an almost seven-week high near 105.85.
- Prospects for further policy divergence have strengthened as investors expect that the Fed will start reducing interest rates from the September meeting and will deliver one more rate cut in November or December. On the contrary, the ECB, the Bank of Canada (BoC), and the Swiss National Bank (SNB) have already entered a policy-easing phase. The SNB delivered its second consecutive rate cut in its meeting on Thursday. The Bank of England (BoE) is expected to start lowering interest rates in August.
- Fed policymakers emphasize keeping interest rates at their current levels until they see inflation declining for months. In the latest interest-rate projections, Fed officials signaled only one rate cut this year.
- Market speculation of two Fed rate cuts this year was prompted by a higher-than-expected decline in the United States (US) inflation and slower growth in Retail Sales. On the inflation outlook, Minneapolis Fed Bank President Neel Kashkari said on Thursday that inflation would return to the bank’s target of 2% in up to two years. Kashkari remained concerned about high wage growth and acknowledged it is a key barrier to achieving price stability.
Technical Analysis: EUR/USD stabilizes below 1.0700
EUR/USD extends its correction below the crucial support of 1.0700. The major currency pair declines toward the upward-sloping border of the Symmetrical Triangle pattern formed on a daily time frame. The long-term outlook has become uncertain as the pair establishes below the 200-day Exponential Moving Average (EMA), which trades around 1.0800.
The 14-period Relative Strength Index (RSI) declines below 40.00 for the first time in almost two months, suggesting that the momentum has leaned towards the downside.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
