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EUR/USD recovers from 1.1100 as Fed seems to extend aggressive rate-cut cycle

  • EUR/USD rises from 1.1100 as investors digest downbeat flash Eurozone PMI data for September.
  • Market participants expect the Fed to cut interest rates further by 50 bps in November.
  • Investors shift their focus to the US PCE inflation data for August.

EUR/USD gains after discovering buying interest near the key support of 1.1100 in Tuesday’s North American session. The major currency pair recovers from Monday’s losses, which were triggered after the release of the flash HCOB Purchasing Managers Index (PMI) data for September. 

The PMI report showed that the business activity unexpectedly sank into contraction, which was estimated to fall slightly but remained above the 50.0 threshold that separates expansion from contraction. Weak data weighed heavily on the Euro (EUR) after stoking market expectations for the European Central Bank (ECB) to opt for a second straight interest rate cut in the October meeting.

A decline in the HCOB Composite PMI dominantly came from the manufacturing sector, where contraction in activities accelerated at a faster-than-expected pace. The service sector remained on a growth trajectory but at a slower pace than what economists forecasted.

Weakening Eurozone activity prospects would add to obstacles for ECB policymakers in pursuit of stable market conditions who are already worried about price pressures remaining persistent. Last week, ECB Governing Council Member Isabel Schnabel said that sticky services inflation is keeping headline inflation at an elevated level.

In today’s session, President of Deutsche Bundesbank Joachim Nagel is scheduled to give a speech at 16:00 GMT. Nagel is expected to provide fresh cues on the ECB’s likely interest rate action for the remaining year.

Daily digest market movers: EUR/USD strengthens as investors digest weak Eurozone flash PMI data

  • EUR/USD gains at the US Dollar’s expense (USD) on Tuesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to hold ground above 100.50. The outlook of the US Dollar remains uncertain as traders hold bets supporting more big rate cuts from the Federal Reserve (Fed) in the November meeting. Financial market participants expect that the Fed will opt for a 50 basis point (bps) interest rate cut for the second straight time in the November meeting amid growing concerns over deteriorating job growth.
  • “The Federal Reserve to cut rates by another 50 basis points in November, a decision that will largely depend on incoming data, especially the next monthly jobs report,” according to strategists from Citi.
  • On the contrary, the comments from Fed Governor Michelle Bowman have indicated that she doesn’t see larger-than-usual rate cuts as appropriate as upside risks to inflation are still prominent.
  • On the economic data front, the US S&P Global Composite PMI came in a little lower at 54.4 from the final reading of 54.6 in August as activities in the manufacturing sector unexpectedly declined further. The US S&P Global Services PMI expanded at a faster-than-expected pace of 55.4 but edged lower from the former reading of 55.7. The agency noted that “Business sentiment, demand, hiring, and investment are being subdued by uncertainty surrounding the Presidential Election, casting a shadow over the outlook for the year ahead at many firms.”
  • Later this week, investors will focus on the Personal Consumption Expenditures Price Index (PCE) for August, which will be published on Friday. Signs of price pressures remaining persistent would weigh on market expectations for a Fed 50 bps interest rate cut. On the contrary, soft figures would prompt the same.

Technical Analysis: EUR/USD bounces back from 20-day EMA

EUR/USD rebounds from 1.1100 in North American trading hours on Tuesday. The major currency pair finds support near the 20-day Exponential Moving Average (EMA) near 1.1090.

The outlook of the major currency pair would remain firm till it holds the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological level of 1.1000. 

The 14-day Relative Strength Index (RSI) moves lower to 55, suggesting momentum is weakening.

Looking up, the round-level resistance of 1.1200 will act as a major barricade for the Euro bulls. A decisive break above the same would drive the pair toward the July 2023 high of 1.1276. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support zones.