In the European session on Tuesday, the EUR/USD pair experienced a slight decline from the pivotal resistance level of 1.0900. Despite this retreat, the major currency pair remains relatively robust, primarily driven by the current diminished attractiveness of the US Dollar (USD).
The US Dollar Index (DXY), which gauges the Greenback’s strength against a basket of six major currencies, steadied near a critical support level of 104.00, marking nearly a two-month low. This stabilization follows the release of a disheartening United States (US) ISM Manufacturing Purchasing Managers’ Index (PMI) report for May, exacerbating concerns regarding a deceleration in economic growth and alleviating worries about persistent inflation.
The latest data revealed a contraction in the Manufacturing PMI for the second consecutive month, with a reading of 48.7, below both the consensus forecast of 49.6 and the previous figure of 49.2. Moreover, the New Orders Index, indicating future demand, plummeted to 45.4 from the prior reading of 49.1, signaling a sluggish economic landscape in the second quarter as the Federal Reserve (Fed) persists with its restrictive monetary policy stance.
These indicators compound existing apprehensions about the US economic vitality, especially following the downward revision of Q1 Gross Domestic Product (GDP) growth to 1.3% from the initial estimate of 1.6%.
The bleak US manufacturing data has bolstered market expectations of an imminent interest rate cut by the Fed, with the CME FedWatch tool reflecting a surge in the probability of a rate reduction during the September meeting, rising from 45.8% a week earlier to 60%.
Investor attention now shifts to forthcoming economic releases from the US, including the ISM Services PMI, ADP Employment Change, Nonfarm Payrolls (NFP) report for May, and JOLTS Job Openings data for April. These data points are anticipated to shape market sentiment regarding the likelihood of Fed rate cuts in September.
In light of the prevailing market dynamics, EUR/USD continues to hold firm, with investors closely monitoring the European Central Bank‘s (ECB) upcoming interest rate decision slated for Thursday. Despite initial expectations of a rate cut, recent economic indicators, including an uptick in price pressures and improved economic outlook, have tempered such anticipations. ECB policymakers have emphasized a data-dependent approach, refraining from committing to a specific rate trajectory.
From a technical standpoint, EUR/USD encountered a modest downturn during the European session, notwithstanding its earlier surge to 1.0910 driven by a breakout from the Symmetrical Triangle formation on the daily timeframe. The pair’s short-term outlook remains positive, supported by the upward slope of the 50-day Exponential Moving Average (EMA) near 1.0800.
However, the 14-period Relative Strength Index (RSI) suggests a temporary waning of upside momentum, hovering within the 40.00-60.00 range.
Looking ahead, EUR/USD is poised to test resistance levels at the March 21 high around 1.0940 and the psychological barrier of 1.1000. Conversely, a breach below the 200-day EMA at 1.0800 could trigger further downside movement.
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