EUR/USD slumps after Eurozone PMIs

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.