EURUSD Tests the 200 Weekly SMA After EU Services

The EURUSD pair has shown strong buying momentum this week, continuing its upward momentum from last week’s breakout above 1.10. On Tuesday, the pair climbed to 1.1174, encountering resistance at the 200-weekly SMA and surpassing the December 2023 high of 1.1140, however, the surge stalled at the 200 weekly SMA yesterday, ahead of the Eurozone and US PMI readings.

EUR/USD Chart Weekly – The 200 SMA Holding As Resistance for Now

The Euro’s recent strength has been fueled by an increase in risk appetite following its break above the 2024 high at 1.1043, bolstered by weaker US economic data and growing expectations of a rate cut by the Federal Reserve in September. The latest FOMC meeting minutes revealed that officials began discussing potential rate cuts in July, increasing the chances of at least a quarter-point reduction on September 18.

Rate traders have now priced in about a 40% probability of a 0.50% interest rate cut in September, reflecting the market’s anticipation of a more aggressive policy shift by the Fed, which gave EUR/USD the final push higher last evening. Today, attention shifted to the Flash manufacturing and services PMIs, with the market eagerly awaiting Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium tomorrow.

Eurozone and Germany’s August Flash PMIs by HCOB on August 22, 2024:

Eurozone Flash Manufacturing and Services PMI:

• Services PMI: 53.3 points, exceeding expectations of 51.9 points (previous: 51.9 points).
• Manufacturing PMI: 45.6 points, slightly below the expected 45.8 points (previous: 45.8 points).
• Composite PMI: 51.2 points, beating expectations of 50.1 points (previous: 50.2 points).

Germany Flash Manufacturing and Services PMI:

• Manufacturing PMI: 42.1 points, falling short of the expected 43.5 points (previous: 43.2 points).
• Services PMI: 51.4 points, below the expected 52.3 points (previous: 52.5 points).
• Composite PMI: 48.5 points, underperforming the expected 49.2 points (previous: 49.1 points).

The primary driver of business expansion this month appears to be the strong performance of the French services sector. However, it’s important to note that this surge is likely a temporary effect linked to the Paris Olympics. As a result, the momentum could weaken in the coming months. Meanwhile, the ongoing decline in global manufacturing conditions, coupled with the slowdown in the German economy, raises significant concerns.

HCOB Notes:

“At first glance, this looks like a pleasant surprise: activity in the Eurozone picked up in August. But a closer look at the numbers reveals that the underlying fundamentals might be shakier than they appear. The boost largely comes from a surge in services activity in France, with the Business Activity Index jumping by almost five points, likely linked to the buzz surrounding the Olympic Games in Paris. It’s doubtful this momentum will carry over into the coming months, however. Meanwhile, the overall pace of growth in the services sector has slowed down in Germany, and the eurozone’s manufacturing sector remains in rapid decline.

“It’s a tale of two worlds. The manufacturing sector remains mired in recession, while the services sector still appears to be growing at a decent clip. But with the temporary Olympic boost in France fading and signs of waning confidence across the Eurozone’s service industry, it’s likely only a matter of time before the struggles of the manufacturing sector start weighing on services too.

“Manufacturers raised their selling prices for the first time since April 2023, a response to three straight months of rising input costs. Despite weakening demand, firms seem to have had little choice but to pass on some of these higher costs to customers. On the bright side, this suggests there’s still some pricing power in the market.

“The ECB might find some reassurance in the latest price indices. Input costs in the services sector, which are closely watched by monetary authorities due to the significant role wages play, rose at the slowest pace in 40 months. So, even though output prices in the service sector climbed faster than they did in July, the easing of cost pressures strengthens the case for an interest rate cut at the ECB’s September meeting.”

EUR/USD Live Chart