EUR/USD Trades Near 1.0705 Amid Downbeat US PMI Data

The EUR/USD currency pair traded near the 1.0705 level on Wednesday, bolstered by weaker-than-expected US April PMI data that weighed on the US dollar. The US composite PMI slipped to 50.9 in April, indicating the slowest expansion in the private sector since December 2023 and suggesting the US economy may not be as exceptional as other indicators suggest.

The data prompted a shift in market expectations, with traders now pricing in the possibility of two quarter-point rate cuts by the Federal Reserve this year. The US dollar index dropped over 0.4% on the day, its second-biggest daily fall of the month. Meanwhile, the euro rallied to a 1.5-week high against the US dollar, with the Eurozone composite PMI climbing to 51.4 in April, topping market consensus.

Why this matters: The divergence in economic performance between the US and Eurozone, as reflected in the PMI data, has significant implications for monetary policy decisions and currency market dynamics. The weaker US data raises doubts about the strength of the US economy and the Federal Reserve's rate hike path, while the stronger Eurozone data supports the euro's rally against the US dollar.

Technically, the EUR/USD pair's bearish trend remains intact on the four-hour chart, but a decisive break above the key resistance at 1.0710-1.0715 could see the pair rally to the April 11 high at 1.0756 and potentially the 1.0800 level. On the downside, the first target is the April 23 low at 1.0638, with a breach of this level exposing the November 2 low at 1.0565.

The focus remains on upcoming US macroeconomic data, including the Advance Q1 GDP report and the Personal Consumption Expenditures (PCE) Price Index, which will influence the near-term US dollar dynamics and provide direction to the EUR/USD pair. The recent hawkish remarks by several Fed officials suggest that the central bank is in no rush to cut interest rates, keeping US Treasury bond yields elevated and acting as a headwind for the EUR/USD pair.

The EUR/USD pair pared earlier gains later in the day, despite upbeat German economic sentiment data. Stubborn price momentum in the services sector in both the US and Europe has delayed the expected interest rate cuts by the Federal Reserve and the European Central Bank (ECB). ECB governing council member Joachim Nagel expressed doubt about the sustainability of inflation falling, which could impact the ECB's decision on rate cuts in June.

Key Takeaways

• EUR/USD rose on weaker-than-expected US April PMI, signaling US economic slowdown.
• Diverging US-Eurozone PMI data prompts market expectations of Fed rate cuts this year.
• EUR/USD technical analysis suggests potential rally to 1.0756 and 1.0800 if 1.0710-1.0715 breached.
• Upcoming US GDP and PCE data to influence near-term USD dynamics and EUR/USD direction.
• Stubborn inflation in US and Europe delays expected interest rate cuts by Fed and ECB.