EUR/USD finds cushion even though Eurozone economic activity contracts again

24 Oct 2024, 09:18 by Sagar Dua · FXStreet

EUR/USD holds support near 1.0760 while the near-term outlook remains downbeat amid weakness in Eurozone business activity.
Traders look for fresh cues about the ECB’s likely interest rate cut size in December.
EUR/USD has also benefitted from a slight correction in the US Dollar.

EUR/USD has also added some gains in the European session on Thursday at the US Dollar’s (USD) expense. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, corrects slightly to near 104.20 after posting a fresh 12-week high around 104.50 on Wednesday.

However, the near-term outlook of the US Dollar remains firm as investors expect the Federal Reserve (Fed) to follow a more gradual rate-cut approach. Wednesday’s Fed Beige Book showed that the overall business activity was little changed through early October, and there was a slight uptick in hiring with moderate growth in inflationary pressures.

Meanwhile, the uncertainty over the United States (US) presidential election on November 5 has also kept strength in the US Dollar afloat. Market participants worry that the scenario of Trump winning the election will result in higher tariffs, which will have a significant impact on closed trading partners to the US.

Going forward, the next move in the US Dollar will be driven by the preliminary US S&P Global PMI data for October and the Durable Goods Orders data for September, which will be published at 13:45 GMT and on Friday, respectively.

Daily digest market movers: EUR/USD edges higher as US Dollar's rally stalls

EUR/USD finds fresh buying interest near a three-month low of 1.0760 in Thursday’s European session. The major currency pair strengthens even though the preliminary Hamburg Commercial Bank (HCOB) Composite Purchasing Managers Index (PMI) data showed that the Eurozone's economic activity continued to contract in October. The PMI ticked higher to 49.7 from 49.6 in September, below the 50 threshold that separates expansion from contraction, amid a continuous decline in the manufacturing sector activity and moderate growth in the service sector output.
“The eurozone is stuck in a bit of a rut, with the economy contracting marginally for the second month running. The ongoing slump in manufacturing is being mostly balanced out by small gains in the service sector. At the country level, it can be noted that the deterioration of the situation in France was met by a slight moderation in the decline in Germany. For now, it is not clear whether we will see a further deterioration or an improvement in the near future,” said Dr. Cyrus de la Rubia, Chief Economist at HCOB.
The HCOB PMI report also showed subdued business confidence, weak orders from domestic and overseas markets, a modest increase in input prices, and a reduction in the workforce, which points to the need for economic stimulus that would prompt expectations of more interest rate cuts by the European Central Bank (ECB).
The ECB has already reduced its Deposit Facility Rate by 75 basis points (bps) this year to 3.25%, and traders expect the central bank to cut again in December. Meanwhile, market participants are uncertain about the likely rate-cut size as the option of a larger-than-usual reduction has come into the picture.
On Wednesday, Governor of the Bank of Portugal and ECB policymaker Mario Centeno said that the option of a 50 bps rate cut in December is on the table. Centeno warned that downside risks to growth are accumulating.

Technical Analysis: EUR/USD remains edgy above 1.0760

EUR/USD finds temporary support near 1.0760 in European trading hours. However, the outlook of the major currency pair remains downbeat as it stays below the 200-day Exponential Moving Average (EMA), which trades around 1.0900.

The downside move in the shared currency pair started after a breakdown of a Double Top formation on the daily time frame near the September 11 low at around 1.1000, which resulted in a bearish reversal.

The 14-day Relative Strength Index (RSI) indicator dives below 30.00, indicating a strong bearish momentum. However, a recovery move remains on the cards as conditions turn oversold.

On the downside, the major could see more weakness towards the round-level support of 1.0700 if it slips below the upward-sloping trendline at 1.0750, which is plotted from the October 3 low around 1.0450. Meanwhile, the 200-day EMA near 1.0900, and the psychological figure of 1.1000 will be the key resistance for the pair.

Economic Indicator

HCOB Composite PMI

The Composite Purchasing Managers’ Index (PMI), released on a monthly basis by S&P Global and Hamburg Commercial Bank (HCOB), is a leading indicator gauging private-business activity in the Eurozone for both the manufacturing and services sectors. The data is derived from surveys to senior executives. Each response is weighted according to the size of the company and its contribution to total manufacturing or services output accounted for by the sub-sector to which that company belongs. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. The index varies between 0 and 100, with levels of 50.0 signaling no change over the previous month. A reading above 50 indicates that the private economy is generally expanding, a bullish sign for the Euro (EUR). Meanwhile, a reading below 50 signals that activity is generally declining, which is seen as bearish for EUR.