The EUR/USD pair rose above the 1.0850 level as the US dollar retreated on Friday.
It rose despite the core Personal Consumption Expenditures (PCE) price index data for June in the United States coming in higher than expected.
The PCE inflation report showed that core inflation rose steadily by 2.6% year-on-year, while expectations were for price pressures to slow to 2.5%. Monthly inflation also grew at a faster pace of 0.2% compared to the estimates and the previous release of 0.1%.
I believe that the solid figures will dampen expectations for an early rate cut by the Federal Reserve. Currently, the market sees the likelihood of a rate cut in September as certain, whereas I think it is now unlikely.
The US dollar index (DXY) fell to nearly 104.30 points. The next catalyst for the US dollar will be the Federal Reserve’s monetary policy meeting, scheduled for next Wednesday.
The Federal Reserve is expected to leave the main interest rates unchanged in the 5.25% – 5.50% range. Therefore, investors will focus on signals about whether market expectations for a rate cut are appropriate, and this is where the surprise will be.
In my view, the rise of the EUR/USD pair occurred despite investors’ concerns about the euro’s future due to multiple challenges. The future of the eurozone economy has been significantly harmed as its largest countries face difficult times.
The composite PMI for Hamburg Commercial Bank (HCOB) in Germany contracted in July due to a decline in private sector business activity. The PMI data came in lower at 48.7 from the previous release of 50.4.
In my opinion, things turned around yesterday when the US GDP numbers were released. Generally, markets look to the future and factor in announced expectations, but this did not happen. The data figures caused a trend reversal. Admittedly, consumer spending came in slightly higher than expectations at 2.3%, and markets should have been more realistic.
We should also note that the positive surprise in GDP growth (2.8% versus the expected 2.0%) was enough to change market sentiment. But in my opinion, caution is definitely needed in the near and medium term, as yesterday’s figures did not put a real end to concerns about the US consumer and manufacturing sector. This week, we have several important market data, including US payrolls and global manufacturing PMI, which could reignite these concerns.
This seems to be a serious problem. The German economy has returned to contraction territory, affected by the sharp and dramatic decline in industrial output. Hopes that this sector would benefit from a better global economic climate are fading.
With the composite PMI now below 50, GDP is expected to contract by 0.4% in the third quarter compared to the second quarter. While it is still very early and many data figures have yet to be released, the second half of the year has started with very weak numbers.
Meanwhile, the increasing expectations for two more rate cuts by the European Central Bank are negatively affecting the euro. Few ECB officials see the strong expectations for two more rate cuts as appropriate. ECB officials’ confidence has increased amid expectations that inflation will sustainably return to the desired rate of 2% in 2025. Lowering rates is necessary to revive the economy.
German Finance Minister Christian Lindner’s announcement of a €30 billion tax cut for businesses and households on Wednesday indicated the government’s concerns about the weak demand environment.
US two-year bond yields rose above the support level as we expected and could see further increases. In the long term, yields remain mixed. But there is support pushing them higher in the coming days. The release of the US PCE data today will be important to follow. German yields also fell again. But support can limit the decline and keep the main upward trend intact.
In my view, the main catalyst for the euro in the future will be the preliminary data for the Harmonized Consumer Price Index (HICP) for the eurozone in July, scheduled for release this week. Inflation data will also provide new signals on the timing of another rate cut by the ECB. Currently, traders expect the ECB to resume its monetary easing cycle in September.
