EUR/USD analysis: Weak manufacturing PMIs boost early ECB rate cut calls

• EUR/USD analysis: Poor Eurozone manufacturing PMI data underscores Eurozone’s struggles
• Investors increase bets on ECB rate cuts after Fed, SNB policy meetings
• EUR/USD technical analysis: Price held 200-day average support but bullish momentum has been lost

The EUR/USD was hit by weak manufacturing data from the Eurozone this morning, after managing to rally in reaction to the dovish-leaning policy meeting from the Fed on Wednesday, when we also witnessed a surge in stocks, gold, and bonds, resulting in a dip in yields and the US dollar. Today, we shall observe whether these movements have further momentum or if we encounter the typical post-Fed decline, as traders take profits.  US index futures managed to extend their gains, and certain European indices such as the DAX opened in uncharted territory before retracing slightly as investors reacted to the weak Eurozone manufacturing PMI data, while the Swiss franc plunged after the Swiss National Bank surprised the markets with a rate cut. Additionally, gold prices soared to new heights during the early Asian session before moderating amidst profit-taking and as investors adopted a more cautious view of the Fed's assessment of interest rates. The EUR/USD was hit by weaker Eurozone manufacturing data, before bouncing somewhat to turn flat on the day.

EUR/USD analysis: Poor Eurozone manufacturing PMI data underscores Eurozone’s struggles

Since June 2022, the manufacturing sector activity in the Eurozone has remained in contraction. Once again, the latest data missed expectations, with the latest PMI data from the sector falling to 45.7 from 46.5 previously, moving deeper below the expansion/contraction threshold of 50.0. While the services PMI improved more than expected, to 51.1 from 50.2, this was not enough to offset concerns about the manufacturing sector. On a country level, German manufacturing was particularly weak at 41.6 compared to 42.5 from the previous month. The Eurozone’s economic powerhouse is on the brink of falling into a technical recession. The Eurozone’s second largest economy, France, isn’t doing great either with both manufacturing (45.8) and services (47.8) PMIs disappointing expectations.

Investors increase bets on ECB rate cuts after Fed, SNB policy meetings

While ECB officials such as President Christine Lagarde has tried to dampened bets on a streak of rate cuts starting in June, the markets are not calling it. Money markets have now priced in around 90% chance of an ECB rate cut by June. This stood at less than an 80% chance late on Wednesday. Investors are expecting more than 90 bps of cuts in 2024 from 85 the day before. The dovish Fed and SNB’s surprise cuts seem to have raised investor conviction over ECB rate cuts.

Did the market overact to the Fed’s policy decision?

The FOMC upheld interest rates unchanged for the fifth successive meeting on Wednesday, reaffirming its position of awaiting stronger confidence in inflation before contemplating rate cuts. The principal takeaway was that despite recent elevated inflation figures, the Fed's dot plots, and Powell’s remarks hinted at an inclination towards future rate reductions, suggesting a potential shift in monetary policy. Contrary to analysts' prior predictions, the Fed still anticipates three rate cuts for this year but now approaches 2025 cuts with greater caution.

Nonetheless, the recent surge in core inflation figures and robust performances in key commodity prices such as crude oil and particularly cocoa could result in inflation persisting higher than anticipated, hindering the Fed and other central banks from implementing the easing policies as envisaged.

However, should US inflation data begin to decline again, confirming the Fed's doubts regarding early-year inflation spikes, we may witness a growing momentum in a downward trend for the dollar in the months ahead.

EUR/USD analysis: Technical levels and factors to watch

Source: TradingView.com

Despite concerns from a macro viewpoint for the Eurozone, the weaker US dollar has ensured that for the time being anyway, the bullish bias remains intact for the EUR/USD, with the pair bouncing nicely on Wednesday from its 200-day moving average at 1.0835. This level is now pivotal as far as the short-term trend is concerned. Should it break below here in the coming days then that would be a bearish development, especially if it also triggers a move below 1.0795, which was the low from the end of February, the last low prior to the recent up move.

The bulls will now need to see a clean break above the short-term bearish trend line that comes in around 1.0940-1.0950 area. If that happens, the next stop could well be 1.1000. In that case, there will be a strong possibly for rates to head towards the December high of 1.1140 in subsequent days.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R