Euro slips as strong US PMI supports Greenback

EUR/USD pares gains as a firmer US Dollar caps the upside.
Strong US business activity, elevated Oil prices and new tariffs keep inflation risks in focus.
Upbeat Eurozone PMI data and prospects of a September ECB hike offer limited support to the Euro.

Vishal Chaturvedi FXStreet

EUR/USD pares earlier gains on Friday as the widening Middle East war and hawkish Federal Reserve (Fed) expectations keep the US Dollar (USD) pinned near recent highs. At the time of writing, the pair trades around 1.1377, hovering near a three-week low after retreating from an intraday high of 1.1401.

The Greenback also draws support from stronger business activity data. The preliminary S&P Global Composite Purchasing Managers’ Index (PMI) rose to an eight-month high of 53.6 in July from 51.9 in June, while the Services PMI climbed to 53.6 from 51.2. The Manufacturing PMI edged down to 53.8 from 53.9.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.42, recovering from an intraday low of 101.25.

Meanwhile, West Texas Intermediate (WTI) is up nearly 8% this week as the Middle East war threatens shipping through two major energy routes, the Strait of Hormuz and Bab el-Mandeb. Elevated Oil prices keep inflation risks alive and reinforce expectations that the Fed may need to raise interest rates.

Trade tensions also add to the inflation concerns after the United States (US) imposed new tariffs of 10% and 12.5% on imports from 60 trading partners on Friday.

According to the CME FedWatch Tool, markets now see an 80% chance of a rate hike in September, while the Fed is widely expected to keep interest rates unchanged at its July 28-29 meeting.

The Euro (EUR) initially drew support from stronger-than-expected Eurozone business activity data. The preliminary HCOB Composite Purchasing Managers’ Index (PMI) rose to a five-month high of 51.9 in July from 50.0 in June, beating the market forecast of 50.2. The Services PMI climbed to 51.6 from 49.4, while the Manufacturing PMI increased to 52.0 from 51.4.

EUR front-end supported as ECB keeps September hike option open

According to TD Securities, the ECB “left the deposit rate on hold at 2.25%,” with the statement and press conference continuing to flag “inflationary pressures” and to stress the need for a “meeting-by-meeting approach,” thereby “leaving the door open for a September hike.” The bank notes that the immediate “market reaction was fairly muted,” and on the rates side it therefore “favour[s] a long bias for EUR front-end.” In foreign exchange, TD Securities observes that “EURUSD was muted on unchanged ECB guidance,” while “near-term EUR downside pressure stays.”

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

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