EUR/USD found support in the lower 1.0700s and staged a recovery after a better-than-anticipated final Eurozone Manufacturing PMI release on Tuesday. Although German inflation data came in slightly below forecasts, its impact on the pair was minimal.
Eurozone Manufacturing PMI Provides Upside Surprise
EUR/USD gained some traction following the final March reading of the Eurozone HCOB Manufacturing PMI, which rose to 46.1, exceeding market expectations of 45.7. While still below the growth/contraction threshold of 50, the improvement contrasted with the recent expansionary shift in US Manufacturing PMIs.
The pair had weakened during the Easter weekend due to robust US economic data and hawkish comments from Fed Chairman Jerome Powell, fueling US Dollar strength and reducing the likelihood of a June Fed rate cut. Higher interest rates typically attract capital inflows, boosting the US Dollar.
ECB Rate Cuts Remain on the Table
Slower growth and easing inflation in Europe suggest that the European Central Bank (ECB) may be more inclined to proceed with rate cuts to stimulate economic activity. This divergence in central bank policy trajectories weighs negatively on the EUR/USD outlook.
Tuesday’s release of German Harmonized Index of Consumer Prices showed a slowdown to 2.2% YoY in March, below the 2.3% expectation. While reinforcing the case for potential ECB rate cuts in June, this data failed to significantly impact the EUR/USD pair.
US Economic Data Signals Strength
On Good Friday, the Fed’s preferred inflation metric, the core Personal Consumption Expenditures Price Index (PCE), came in at 2.8% for February, in line with forecasts but below January’s 2.9% reading. While this suggests some easing, overall price pressures remain above the Fed’s 2.0% target.
Additionally, positive US Manufacturing data on Easter Monday, with the ISM Manufacturing PMI surging back into expansionary territory, further supported the US Dollar.
ECB Governing Council member Robert Holzmann indicated the ECB could potentially cut interest rates before the Fed and suggested that the timing would depend on June wage and price trends. This outlook contrasts with Fed Chair Jerome Powell’s relatively hawkish stance, emphasizing that there is no need for the Fed to “be in a hurry to cut” rates.
Technical Analysis: EUR/USD Downtrend Continues
EUR/USD remains within its dominant short-term downtrend established from the March 8 high. It is currently testing key support at the 1.0694 year-to-date (YTD) low. An oversold signal on the Relative Strength Index (RSI) suggests some hesitancy among sellers. If the RSI rebounds above 30, it could trigger short position closures and a technical bounce; however, the overall bearish trend favors an eventual breakdown.
A decisive break below the 1.0694 February/YTD lows (characterized by a strong bearish candle or multiple consecutive down candles) could lead to further weakness, targeting the 1.0650s level.