EUR/USD finds cushion as US Dollar corrects, Eurozone PMI contracts again

EUR/USD adds some gains in the North American session on Thursday at the US Dollar’s (USD) expense. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, corrects slightly to near 104.20 after posting a fresh 12-week high around 104.50 on Wednesday.

However, the near-term outlook of the US Dollar remains firm as investors expect the Federal Reserve (Fed) to follow a more gradual rate-cut approach. Wednesday’s Fed Beige Book showed that the overall business activity was little changed through early October, and there was a slight uptick in hiring with moderate growth in inflationary pressures.

The uncertainty over the United States (US) presidential election on November 5 has also kept strength in the US Dollar afloat. Market participants worry that the scenario of Trump winning the election will result in higher tariffs, which will have a significant impact on closed trading partners to the US.

On the economic front, the preliminary US S&P Global PMI report for October showed that the overall business activity expanded at a faster pace to 54.3 from 54.0 in September. Higher business activity was driven by a surprisingly larger-than-expected growth in the Service PMI. The output from the manufacturing sector contracted for the fourth straight month. However, the pace was slower than expected.

Meanwhile, Initial Jobless Claims for the week ending October 18 have come in at 227K, lower than expectations and the prior release of 242K.

Daily digest market movers: EUR/USD rises while its overall outlook remains uncertain

• EUR/USD finds fresh buying interest near a three-month low of 1.0760 in Thursday’s North American session. The major currency pair strengthens even though the preliminary Hamburg Commercial Bank (HCOB) Composite Purchasing Managers Index (PMI) data showed that the Eurozone's economic activity continued to contract in October. The PMI ticked higher to 49.7 from 49.6 in September, below the 50 threshold that separates expansion from contraction, amid a continuous decline in the manufacturing sector activity and moderate growth in the service sector output.
• “The eurozone is stuck in a bit of a rut, with the economy contracting marginally for the second month running. The ongoing slump in manufacturing is being mostly balanced out by small gains in the service sector. At the country level, it can be noted that the deterioration of the situation in France was met by a slight moderation in the decline in Germany. For now, it is not clear whether we will see a further deterioration or an improvement in the near future,” said Dr. Cyrus de la Rubia, Chief Economist at HCOB.
• The HCOB PMI report also showed subdued business confidence, weak orders from domestic and overseas markets, a modest increase in input prices, and a reduction in the workforce, which points to the need for economic stimulus that would prompt expectations of more interest rate cuts by the European Central Bank (ECB).
• The ECB has already reduced its Deposit Facility Rate by 75 basis points (bps) this year to 3.25%, and traders expect the central bank to cut again in December. Meanwhile, market participants are uncertain about the likely rate-cut size as the option of a larger-than-usual reduction has come into the picture.
• On Wednesday, Governor of the Bank of Portugal and ECB policymaker Mario Centeno said that the option of a 50 bps rate cut in December is on the table. Centeno warned that downside risks to growth are accumulating.

Technical Analysis: EUR/USD remains supported near 1.0750

EUR/USD finds temporary support near 1.0760 in European trading hours. However, the outlook of the major currency pair remains downbeat as it stays below the 200-day Exponential Moving Average (EMA), which trades around 1.0900.

The downside move in the shared currency pair started after a breakdown of a Double Top formation on the daily time frame near the September 11 low at around 1.1000, which resulted in a bearish reversal.

The 14-day Relative Strength Index (RSI) indicator dives below 30.00, indicating a strong bearish momentum. However, a recovery move remains on the cards as conditions turn oversold.

On the downside, the major could see more weakness towards the round-level support of 1.0700 if it slips below the upward-sloping trendline at 1.0750, which is plotted from the October 3 low around 1.0450. Meanwhile, the 200-day EMA near 1.0900, and the psychological figure of 1.1000 will be the key resistance for the pair.