- EUR/USD slumps after German and Eurozone PMI data show contraction in Manufacturing.
- The move pares gains made after the dovish hold by the Fed weakened the US Dollar.
- The Fed continues to expect to make three 0.25% interest rate cuts in 2024, same as December.
EUR/USD is trading down over a tenth of a percent on Thursday, in the lower 1.0900s, after the release of Eurozone PMI data showed a deeper-than-forecast contraction in Manufacturing PMI data in both Germany and the Eruozone as a whole, despite the Services components gaining.
The move pared the gains made on the back of the Federal Reserve’s decision to hold interest rates at their current levels and maintain the expectations that it will cut interest rates three times in 2024.
EUR/USD rotates lower after Manufacturing PMI weighs
EUR/USD fell from the mid to the lower 1.0900s after the release of Eurozone HCOB PMI data painted a lopsided picture of growth in the Eurozone. Although the Composite PMI rose to 49.9 thereby beating estimates of 49.7 and the previous February reading of 49.2, an unexpected fall in Manufacturing spoiled the outlook.
HCOB Manufacutruing PMI in March fell to 45.7, declining deeper into contractionary territory (below 50) than had been predicted. Economists had estimated a more bouyant rise to 47.0 from 46.5 previously.
Euro area HCOB Services PMI rose to 51.1 in March, beating estimates of 50.5 from 50.2 previous, according to data from S&P Global.
Europe’s economic powerhouse Germany, meanwhile, revealed a similar trend, with German HCOB Manufacturing PMI declining to 41.6 which was below estimates of 43.1 and February’s 42.5. It too showerd unexpected gains, however, in both Services component and the Composite number.
The decline of the Euro after the data was put down to a “Deeper manufacturing contraction both in Germany and EU,” according to Dhwani Mehta, a senior analyst at FXStreet.
Fed maintains status quo
At its policy meeting on Wednesday, the Fed left the Fed Funds Rate unchanged at 5.25%-5.50% as widely expected. In its accompanying forecast document, the Summary of Economic Projections (SEP), it continued to foresee rates falling to a median target of 4.6% in 2024, like it did in December.
This is equivalent to expecting around three 25 bps (0.25%) of rate cuts this year, even though some market participants had speculated it might reduce the number of cuts to two because of stickier-than-expected inflation.
It did, however, see less rate cuts in 2025, with the Fed Funds Rate falling to a median of only 3.9% rather than the 3.6% in the December SEP.
The Fed revised up its GDP forecast substantially, to 2.1% for 2024, from 1.4% in December – regarded by many as indicative of a “soft landing”.
The central bank’s preferred gauge of inflation, the Core Personal Consumption Expenditure (PCE) – Price Index, was revised up to 2.6% for 2024 from 2.4% in December.
In his press conference after the meeting, Federal Reserve Chairman Jerome Powell sought to play down the latest batch of hot inflation readings, saying only two months of data was not enough to dissuade the Fed from its path.
The overall interpretation was of a “dovish hold,” which resulted in the US Dollar selling off from overbought territory. The EUR/USD pair, which measures the buying power of a single Euro (EUR) in US Dollars (USD), rallied back up into familiar territory.
Technical Analysis: EUR/USD returns to the 1.0900s
EUR/USD reversed on a dime at around the level of the 200-day Simple Moving Average (SMA) in the 1.0830s and surged higher after the Fed meeting. On Thursday, however, it pared gains following weak manufacturing data from the Eurozone.
It is now trading in the lower 1.0900s and seems to be trading in a range, with no real bias one way or another.
Euro versus US Dollar: 4-hour chart
The reversal at Wednesday’s lows continues to show momentum, however, and if price pushes higher it will probably meet resistance at the 1.0964 March 13 highs. If it breaks above them the March 8 highs for the month come into view at 1.0981. A break above them would turn the outlook bullish again.
Alternatively, the up move could petter out and price could also fall back down to target the 50-day SMA in the 1.0840s followed by the 200-day again in the 1.0830s.
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.
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