In Monday’s European session, the EUR/USD currency pair experienced significant selling pressure, dropping below the critical support level of 1.1100. This decline was driven by a combination of poor Eurozone Purchasing Managers’ Index (PMI) data for September and a robust recovery in the US Dollar.
The Eurozone Composite PMI unexpectedly contracted to 49.0, falling short of economists’ expectations for a modest decline to 50.6 from August’s reading of 51.0. The downturn was primarily attributed to a sharp contraction in the manufacturing sector, alongside slower growth in services.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, remarked on the PMI data, stating, “The eurozone is heading towards stagnation. After a temporary boost from the Olympic effect in France, the Composite PMI has dropped to its lowest point in 15 months, slipping below the expansionary threshold. Given the rapid decrease in new orders and order backlogs, it is easy to foresee further economic weakening.”
This anticipated weakness may fuel speculation about a potential third interest rate cut by the European Central Bank (ECB) in October. Recent statements from ECB officials reflect growing concerns over persistent price pressures. ECB Vice President Luis de Guindos emphasized the need for more favorable inflation data before considering further rate cuts, noting, “We will have more information in December than in October.”
In the context of the US economy, the US Dollar has gained traction despite increasing speculation that the Federal Reserve may implement a larger-than-usual 50 basis points interest rate cut in its November meeting. According to the CME FedWatch tool, the probability of a 50 bps reduction has risen to 51.7%, up from 29.3% a week earlier. In contrast, a Reuters poll indicates that the Fed is expected to cut rates by 25 bps at both the November and December meetings.
Fed Governor Michelle Bowman expressed her opposition to initiating the easing cycle with a 50 bps cut, arguing that such a move could inflate demand before inflation reaches the Fed’s target of 2%.
As for upcoming US economic data, market participants are keenly awaiting the preliminary S&P Global PMI figures for September, set to be released at 13:45 GMT. Analysts predict the Manufacturing PMI will rise to 48.5, still below the critical 50.0 mark, while the Services PMI is expected to decline to 55.2 from 55.7.
Technical Analysis: The EUR/USD pair has fallen below 1.1100, with interim support anticipated near the 20-day Exponential Moving Average at approximately 1.1090. The outlook remains positive as long as the pair holds above the breakout point of the Rising Channel pattern near the psychological level of 1.1000. The 14-day Relative Strength Index (RSI) is trending downward at 55, indicating weakening momentum.
On the upside, resistance at the round number of 1.1200 will present a significant challenge for Euro bulls. A decisive break above this level could propel the pair towards the July 2023 high of 1.1276. Conversely, major support levels are identified at the psychological mark of 1.1000 and the July 17 high near 1.0950.
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