EUR/USD treks higher as US data underwhelms.

EUR/USD extends its recovery as mixed US data weighs on the US Dollar.
The US Dollar may also now already have “a lot priced in” according to analysts at Commerzbank.
The short-term trend could now be bullish on the 4-hour chart.

EUR/USD sherpa-treks higher on Thursday, with a foothold now above 1.0700 as it continues its labored recovery from the 1.0601 April lows. Recent mixed US data has tarnished the image of the US economy, undermining the supremacy of the US Dollar (USD), whilst the Euro (EUR) holds firm on strong services-sector data.

EUR/USD rises as US data mixed

EUR/USD began its recovery on Tuesday after preliminary US PMI data for April showed an unexpected cooling in business activity, suggesting the economy was beginning to feel the burden of higher interest rates.

On Wednesday, the US Census Bureau revealed that Durable Goods Orders in the United States increased 2.6% MoM in March, up from a 0.7% rise previously, and beating estimates of 2.5%. Core goods, which exclude transportation, increased by 0.2% MoM, an improvement over February’s 0.1% increase, but short of the 0.3% projected.

Whilst the Durable Goods data was positive, it failed to move USD. This could be because it is viewed as a volatile series or, as some now think, because a lot is already priced into the Dollar, making it less sensitive to positive data.

“A lot is already priced into the Dollar” – Commerzbank

EUR/USD’s recovery may be due to the US Dollar having priced in a lot, in particular the acute shift in market expectations regarding the future course of interest rates, according to Analysts at Commerzbank.

Since the Federal Reserve’s (Fed) March meeting markets have consistently pushed back the date by when the Fed is likely to begin cutting interest rates – higher interest rates attract more foreign capital inflows and are thus positive for the US Dollar.

This recalibration of the future path of interest rates has now been fully priced in, according to Antje Praefcke, FX Analyst at Commerzbank, and in the absence of more catalysts, makes USD more vulnerable to “bad news” than “good news”.

“In my opinion, the market’s reaction (USD falling this week) shows that a lot is already priced into the Dollar, such as a soft landing of the economy or a Fed that will only cut the key interest rate much later than previously thought,” says Praefcke.

The US Dollar having “priced in a lot” is why it reacted more to the poor US PMI data on Tuesday than the positive US Durable Goods Order data on Wednesday.

“It is becoming increasingly difficult for the Dollar to benefit from facts and figures that underpin this expectation (a delay in future rate cuts); on the contrary, it tends to react sensitively when the market has doubts about its current expectation in the face of not-so-good data. The Dollar is gradually running out of steam, although it is currently the undisputed most popular currency and is likely to remain so,” adds the Analyst.

This view may tone the reaction of EUR/USD to first quarter GDP data on Thursday, with a miss causing more damage to USD than a beat.

EUR/USD rises due to services-sector effect

The Euro (EUR), meanwhile, stabilizes as strong Services PMI data stokes services-sector inflation expectations. This is seen potentially reigning in the European Central Bank (ECB) as it forges ahead with cutting interest rates.

Although a June rate cut is probably still a “fait accomplis”, according to Luis de Guindos, the Vice President of the ECB, his colleague at the ECB, Bundesbank President Joachim Nagel was more cautious on Wednesday.

Nagel said, “Services inflation remains high, driven by continued strong wage growth,” and until inflation fell in a sustainable manner he could not “pre-commit to a particular rate path.”

Hi views were echoed by European Central Bank (ECB) executive board member Isabel Schnabel and ECB Policymaker Madis Muller on Thrusday, with Schnabel highlighting persistent services-sector inflation and Muller saying she was not comfortable committing to “back-to-back cuts.”