The EURUSD currency pair eased to 1.1130 Thursday, from a fresh year-to-date high of 1.1175 posted on Wednesday, falling slightly as weak German flash HCOB Composite PMI for August and soft Q2 Eurozone Negotiated Wage Rates weigh on the Euro.
The flash German PMI report showed that activities in the manufacturing sector contracted at a faster-than-expected pace to 42.1. In the services sector, activities expanded at a slower-than-projected pace to 51.4.
On the contrary, Eurozone Composite PMI unexpectedly rose to 51.2, beating economists’ expectations. The report showed that the strong expansion came from robust growth in the service sector’s activity.
The Service PMI expanded strongly to 53.3 from the estimates and the prior release of 51.9. On the contrary, the Manufacturing PMI declined further to 45.6, lower than the 45.8 expected.
Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said: “The boost largely comes from a surge in services activity in France, with the Business Activity Index jumping by almost five points, likely linked to the buzz surrounding the Olympic Games in Paris.
“It’s doubtful this momentum will carry over into the coming months, however. Meanwhile, the overall pace of growth in the services sector has slowed down in Germany, and the Eurozone’s manufacturing sector remains in rapid decline.”
The slowdown in the German economy signaled by the PMI data is unlikely to weigh on market speculation about the European Central Bank interest-rate outlook. However, slower wage growth momentum would strengthen them further.
Negotiated Wage Rates rose at a slower pace of 3.55%, from 4.69% seen in the first quarter this year, upwardly revised from 4.74%.
Markets broadly expect the ECB to cut its key borrowing rates one more time in the last quarter of this year, given that price pressures are anticipated to return to the bank’s target of 2% next year.
The DXY Dollar Index, which tracks the greenback’s value against six major currencies, trades close to 101.00.
The outlook of the US Dollar remains bearish as the Federal Reserve appears to be on track to cut interest rates in September. This would be the first dovish interest rate decision by the Fed in more than four years.
The US central bank has maintained a restrictive monetary policy stance since March 2022 to bring down inflation. Market speculation for Fed interest rate cuts has strengthened as the “vast majority” of Fed officials see policy-easing in September as appropriate, given that inflationary pressures continue to ease further, according to the Federal Open Market Committee (FOMC) minutes of July 30-31.
The FOMC policy meeting minutes also showed that some policymakers were ready to reduce interest rates already back in July.
For more cues on the interest rate path, investors will focus on Fed Chair Jerome Powell’s speech on Friday at the Jackson Hole Symposium. Investors will pay attention to clues about the size of interest rate cuts in September and by how much the Fed could reduce them this year.
In Thursday’s session, investors will keenly focus on the US flash S&P Global PMI data for August. The preliminary PMI report is expected to show that the Composite PMI fell to 53.5 from 54.3 in July.
EURUSD chart by TradingView
(Source: OANDA)
