EUR/USD: Euro Zone Business Growth Slows, US Dollar Gains Strength

EUR/USD Highlights

• Euro weakens against US Dollar due to expected US interest rate stability.
• Euro zone business growth experiences slight slowdown, especially in manufacturing.
• European Central Bank likely to raise rates amidst persistent price pressures.

EUR/USD Overview

The Euro is currently weakening against the U.S. Dollar, showing a decline of over 2% for the month. This trend continued on Tuesday, with the EUR/USD  trading at 1.0776, reflecting a decrease of 0.0036 or -0.33%. The Invesco CurrencyShares Euro Trust ETF (FXE) settled at $99.85 on Monday, marking a slight increase of $0.04 or +0.04%.

USD Supported as Fed Hints at Tighter Policy

The U.S. Dollar gained strength as investors anticipated that U.S. interest rates would remain higher for a longer period. Moreover, ongoing discussions regarding the debt ceiling created uncertainty in the market.

Several influential figures from the Federal Reserve hinted at the need for further tightening of monetary policy. Minneapolis Fed President Neel Kashkari suggested that U.S. rates might need to exceed 6% for inflation to reach the Fed’s 2% target.

Additionally, St. Louis Fed President James Bullard stated that the central bank may raise rates by an additional half-point before the end of the year.

Euro Zone Business Growth Slows

In contrast to the U.S. Dollar, the euro zone witnessed a slight slowdown in business growth. The services industry showed a slight decrease in performance, while the manufacturing sector experienced a more significant downturn.

The HCOB’s flash Composite Purchasing Managers’ Index (PMI) for the euro zone fell from 54.1 in April to 53.3 in May. Although new business growth slowed down, services firms continued to hire at a strong pace, albeit slightly lower than the previous month.

Demand for manufactured goods decreased, leading to the lowest factory PMI since May 2020. The output index also dropped to a six-month low.

ECB Considers Rate Hike

Despite these challenges, factories were able to reduce their prices for the first time since September 2020 due to improved supply chains and lower energy costs.

This development may be seen as positive by policymakers at the European Central Bank (ECB), who have struggled to bring inflation back to their 2.0% target.

However, prices charged by services firms increased at a faster rate. As a result, the ECB is expected to raise the deposit rate by 25 basis points in the coming months, even though many other central banks have paused or will soon pause their rate hikes.

Overall, price pressures remain high, providing support for the case of further rate increases by the ECB.

Technical Analysis

The EUR/USD is trading on the weakside of 1.0834 (S1) on Tuesday, putting it in a bearish position. This is the new resistance.

If sellers continue to emerge and there is an acceleration to the downside then look for the move to possibly extend into 1.0657 (S2).

Overcoming and sustaining a rally over 1.0834 (S1) will signal the return of buyers. This could generate the upside momentum needed to retest the PIVOT at 1.0965 over the near-term.

For a look at all of today’s economic events, check out our economic calendar.