EUR/USD Forecast: Impact of Euro Area PMIs on ECB Rate Cut Bets

Highlights

• The EUR/USD fell by 0.13% on Friday, ending the session at $1.10464.
• On Tuesday, euro area Manufacturing PMIs warrant investor attention.
• Later in the session, US Manufacturing PMI numbers will also need investor consideration.

Friday Overview

The EUR/USD fell by 0.13% on Friday. Following a 0.40% loss on Thursday, the EUR/USD ended the session at $1.10464. The EUR/USD rose to a high of $1.10845 before falling to a low of $1.10342.

Euro Area Manufacturing Sector in the Spotlight

On Tuesday, the euro area manufacturing sector will be in focus. The Manufacturing PMI for Italy and the finalized PMI for the Eurozone will likely have more impact. An unexpected fall in the PMI for Italy and a downward revision to the Eurozone PMI could impact buyer demand for the EUR/USD.

The euro area manufacturing sector contributes less than 40% to the Eurozone economy. However, downward trends in prices, employment, and new orders would signal a weakening demand outlook. The net effect could be softer demand-driven inflation, allowing the ECB to consider discussions about rate cuts.

Economists forecast the Italian Manufacturing PMI to hold steady at 44.4 in December. According to the preliminary survey, the Eurozone Manufacturing PMI remained at 44.2.

Beyond the numbers, investors must consider ECB commentary. Comments on inflation and interest rates would move the dial.

The US Manufacturing Sector in the Spotlight

On Tuesday, the finalized US S&P Global Manufacturing PMI will garner investor interest. According to the preliminary survey, the Manufacturing PMI declined from 49.4 to 48.2 in December.

A downward revision would support bets on a Q1 2024 Fed rate cut. However, investors must consider sub-components, including prices and employment. Inflation and labor market conditions remain considerations for the Fed vis-à-vis interest rates.

The US manufacturing sector accounts for less than 30% of the US economy. However, we expect sensitivity to the PMI, with investors looking for signs of a deterioration in the US economic environment.

Investors must also track Fed commentary. References to inflation, the economic outlook, and interest rates need monitoring.

Short-Term Forecast:

Near-term EUR/USD trends will hinge on inflation and private sector PMIs. Softer euro area inflation and private sector PMI numbers from the euro area could raise bets on a Q1 2024 ECB rate cut. Currently, the markets predict a March 2024 Fed rate cut. Increasing bets on a Q1 2024 ECB rate cut would impact demand for the EUR/USD.

EUR/USD Price Action

Daily Chart

The EUR/USD remained above the 50-day and 200-day EMAs, affirming bullish price signals.

A EUR/USD move through the $1.10720 resistance level would give the bulls a run at the Thursday (Dec. 28) high of $1.11393.

Central bank commentary and Manufacturing PMIs are the focal points for the Tuesday session.

However, a EUR/USD drop below the $1.10 handle would support a fall toward the 1.09294 support level.

The 14-period Daily RSI, 58.22, indicates a EUR/USD return to the $1.11 handle before entering overbought territory.

4-Hour Chart

The EUR/USD held above the 50-day and 200-day EMAs, reaffirming bullish price signals.

A EUR/USD break above the $1.10720 resistance level would bring the Thursday high of $1.11393 into play.

However, a fall through the 50-day EMA would give the bears a run at the $1.09294 support level.

The 14-period RSI on the 4-hour chart, 42.15, indicates a EUR/USD fall to the $1.09294 support level before entering oversold territory.