EUR/USD declined marginally during the North American session on Friday as the US dollar (USD) remained strong following the release of mixed economic data and dovish comments from Federal Reserve (Fed) officials. After hitting a two-week low of 1.1491, the pair is trading 0.20% lower at 1.1504.
Euro retreats 0.20% as weak US sentiment contrasts with strong PMI, markets raise chances of December cut
Data in the US was mixed, yet the economy shows signs of resilience. S&P Global Manufacturing and Services PMIs were mixed in November but showed that business confidence improved.
Other data showed that US households have become pessimistic about the economic outlook, according to the University of Michigan (UoM) consumer sentiment for November. Sentiment fell to the lowest level since 2009 as consumers despaired over higher prices and weakening incomes.
Following the data, EUR/USD’s reaction was muted as traders digested mixed comments from several Federal Reserve officials.
Dovish comments from New York Fed President John Williams and Governor Stephen Miron raised investors’ hopes for a 25-basis-point rate cut at the December meeting. In contrast, Boston Fed President Susan Collins and Dallas Fed President Laurie Logan argued for maintaining a restrictive policy stance while signaling support for keeping rates unchanged.
Given the backdrop, market participants had estimated a 71% chance of a rate cut in December, a sharp jump from about 31% the day before.
Daily Market Movers: Euro falls despite Fed’s dovish stance
- New York Fed President John Williams said policymakers could still cut rates in the “near term,” a comment that removed market odds for a December move. Echoing the same tone, Fed Governor Stephen Miron said Thursday’s nonfarm payrolls data supports a December rate cut, and said if his vote was decisive, he would “vote for a 25-bps cut.”
- On the other hand, Dallas Fed President Lori Logan argued that rates need to remain stable “for some time” while the Fed evaluates the impact of current policy on inflation, adding that she finds it “difficult” to support a December cut. Boston Fed President Susan Collins agreed, saying that “restrictive policy is very appropriate right now.”
- The S&P Global Manufacturing PMI fell to 51.9 from 52.5 in November, just below the 52 consensus. In contrast, the services PMI rose to 55 from 54.8, which topped expectations and signaled continued resilience in the sector.
- Separately, the University of Michigan’s consumer sentiment index rose to 51 from an initial 50.3 in November, better than forecasts but a decline from October’s reading of 53.6. Inflation expectations improved, with the one-year outlook falling to 4.5% from 4.7% and the five-year forecast falling to 3.4% from 3.6%.
- The US Bureau of Labor Statistics (BLS) revealed that non-farm payrolls for September increased by 119K, double the estimate of 50,000. Despite recording a solid number, the unemployment rate rose from 4.3% to 4.4% but remained within the Federal Reserve’s projections.
- The European Central Bank (ECB) speaker crossed the wire. Joachim Nagel said he was confident the central bank would meet its inflation mandate. ECB Vice President Luis de Guindos said growth risks are balanced and the policy rate remains at an appropriate level.
- Eurozone manufacturing activity slipped back into contraction territory in November, with the manufacturing PMI falling to 49.7 from October’s 50 and hopes of an improvement at 50.2 vanishing. The services PMI rose to 53.1 versus the forecast of hold at 53.
Technical Outlook: EUR/USD resumes downtrend as bears come under pressure
EUR/USD extended its losses and hovered around 1.1500 after hitting a daily low of 1.1491. A daily close below the former would open the door to further downside. The next support level will be 1.1491, the daily low of November 5 will be 1.1468, and the 200-day SMA will be near 1.1405.
For a bullish reversal, buyers need to clear the 20-day SMA at 1.1566, followed by the confluence of the 50- and 100-day simple moving averages (SMA) at 1.1641/1.1650. Next is 1.1700.
Euro FAQ
The euro is the currency of the 20 European Union countries that belong to the Eurozone. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of more than $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, with an estimated 30% discount on all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The primary mandate of the ECB is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is to increase or decrease interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by the six permanent members, including the heads of the eurozone’s national banks and ECB President Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the euro. If inflation rises more than expected, especially if above the ECB’s 2% target, the ECB is forced to raise interest rates to bring it back under control. The euro will generally benefit from relatively higher interest rates compared to its peers, as it makes the region more attractive as a place for global investors to park their money.
The data release reflects the health of the economy and could have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the direction of the single currency. A strong economy is good for the euro. This not only attracts more foreign investment but it could also encourage the ECB to raise interest rates, which would directly strengthen the euro. Otherwise, if economic data is weak, the euro is likely to decline. Economic data from the euro zone’s four largest economies (Germany, France, Italy and Spain) are particularly important, as they account for 75% of the euro zone economy.
Another important data release for the euro is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a given period. If a country produces highly demanded exports the value of its currency will be derived entirely from the additional demand generated from foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
