- EUR/USD rebounds after weaker ISM Services PMI data undermines the US Dollar.
- Services inflation in the US is proving sticky but the PMI’s Prices Paid component showed a fairly steep fall.
- The odds of a June interest-rate cut from the Fed have recovered after the data.
EUR/USD is rebounding and trading back above 1.0800 on Thursday, following the release of lower-than-expected ISM Services PMI data from the US.
The data increases the probability of the Federal Reserve (Fed) cutting interest rates by June, bringing it more in line with the more concrete expectations of when the European Central Bank (ECB) will start cutting rates.
The US Dollar (USD) suffered after the release because relatively lower interest rates or their expectation thereof are usually negative for a currency since they reduce inflows of foreign capital.
EUR/USD: Services inflation not so sticky
EUR/USD rebounded strongly on Wednesday after the release of ISM Services PMI for March undershot expectations. But it was probably the sharper fall in the ISM Services Prices Paid component figure, which measures inflation in the sector, which was the main driver of USD weakness.
Services inflation is considered stickier than other types of inflation and is one of the metrics being most closely watched by the Fed as they try to decide when or whether to cut interest rates.
ISM Services Prices Paid: Monthly
The fall in Prices Paid to 53.4 from 58.6 prior, is a sign inflation in the sector is cooling considerably, making it more likely the Fed will cut interest rates by June.
Indeed, this was reflected by the CME FedWatch tool, which gives a market-based probability of future Fed decisions, which is now indicating an over-60% chance of a cut by June, from a probability in the mid-50% range on Monday.
Technical Analysis: EUR/USD threatening to reverse short-term downtrend
EUR/USD extends its recovery from short-term seven-week lows in the 1.0720s on Thursday.
It has now broken above a key resistance level from the swing low at the level of the B wave of the prior ABC pattern, suggesting the recovery is probably more than just a short pullback.
Euro versus US Dollar: 4-hour chart
The established short-term downtrend is in doubt as the peaks and troughs of price start trending higher on the 4-hour chart, which is primarily used to monitor that trend.
If price traces out one more higher low and higher high on the 4-hour timeframe, it will meet the criteria for a new uptrend, and switch the bias towards higher prices.
A break above the key March 26 peak would be a further bullish sign.
Should those criteria be met, the next upside target would be the 1.0940 high of March 21.
However, price is currently encountering substantial dynamic resistance from several major Moving Averages on different timeframes which may make further upside difficult.
As can be seen in the chart above, there are the 4-hour 100 and 200 Simple Moving Averages (SMA), as well as the 50-day and 200-day SMAs on the daily chart (not shown).
There is still, therefore, a risk of some weakness if bears manage to push price down from this confluence of SMAs.
The prior low at 1.0725 is the first downside target, followed by the 1.0694 February and year-to-date low.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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