The euro has reversed directions in the Thursday session and posted considerable gains. Currently, EUR/USD is trading at 1.1735, up 0.41%.
German, eurozone PMIs dip
The euro shrugged off soft PMI reports for September out of Germany and the eurozone. German Manufacturing PMI slowed to 58.5, down from 62.6 beforehand. Although the PMI continues to point to expansion in manufacturing, the index slipped to its lowest level in eight months. The Services PMI fell to 56.0, down from 60.8 and a 4-month low. The PMI also pointed to a slight drop in business confidence towards future activity – although positive, it fell to its lowest level since December 2020. Manufacturers are reporting significant supply shortages and rising prices, while the post-lockdown demand for services has eased. It has been a similar story for eurozone PMIs, which are pointing to a slowdown in manufacturing and services.
Although the PMIs continue to show expansion in the manufacturing and services sectors, the de-acceleration in growth and loss of confidence could weigh on the euro. The currency is in positive territory as the US dollar has retreated against the majors on Thursday, with the exception of the Japanese yen. Still, as the PMIs indicate, this is a result of US dollar weakness rather than euro strength.
The highly-anticipated FOMC meeting signaled that a taper is on its way, provided the US economy continues to perform well. The markets had anxiously been looking for the Fed to provide some clarity on tapering, and there was even hope that policymakers might provide a timeline for scaling back bond purchases. However, there were no commitments from the Fed to press the taper trigger. At a follow-up press conference, Fed Chair Jerome Powell said that the Fed could taper in November if he was satisfied with the economy’s performance. As well, the dot plot showed that two more members projected a rate hike in 2022.
The markets’ reaction is that the Fed is in no hurry to raise interest rates, as they still believe that inflation will be transitory in 2022. The Fed may be committed to tapering in the next few months, but a rate hike is further down the road. With a rate hike on the low burner, the US dollar is under pressure.
- On the upside, EUR/USD faces resistance at 1.1806 and 1.1886
- There is weak support at 1.1685, followed by support at 1.1544
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