On Tuesday, the EUR/USD pair dropped over 0.28%, despite the U.S. economic data showing mixed signals, as Federal Reserve representatives made cautious comments. Simultaneously, reports indicate that economic activity is slowing in the euro area. After peaking at 1.1742, the pair is now trading at 1.1690.
Euro Declines Amid Weak Data and Mixed U.S. Numbers as Geopolitical Tensions Ease
On Monday, the U.S. dollar recovered some losses. Traders seemed less concerned about geopolitical risks after the U.S. detained Venezuelan President Nicolas Maduro. Additionally, ongoing tensions from stagnant peace talks between Ukraine and Russia continue to weigh down the euro.
In the United States, the Purchasing Managers’ Index (PMI) dropped in December from the prior month. Fed President Stephen Milan maintained a dovish stance, while Richmond Fed President Thomas Barkin noted that current policy seems neutral, leaning slightly towards a neutral hawkish position.
Further afield in Europe, the PMI illustrated a decline in the services sector. Germany, the largest economy in Europe, reported inflation falling below the European Central Bank’s (ECB) 2% target, which confirms the ECB’s assessment as long as growth remains stable.
Looking ahead, the EU is set to release the Harmonized Index of Consumer Prices (HICP) for December, along with inflation figures from Italy and Germany’s retail sales data.
In the U.S., traders will be eyeing the ADP employment growth data, ISM services PMI, JOLTS job figures, and upcoming remarks from Fed officials.
Market Trends: Weak German Inflation Exerts Pressure on Euro
- The December S&P Global Services PMI revealed that U.S. business activity is losing steam, dropping from 54.1 to 52.5, while the composite PMI fell from 54.2 to 52.7.
- “While business activity still expanded in December, there are emerging signs of strain in the resilience of the U.S. economy,” remarked Chris Williamson, chief business economist at S&P Global Market Intelligence.
- Richmond’s Thomas Barkin mentioned that future interest rate adjustments will need to be carefully considered, given the conflicting risks facing the job market and inflation. He emphasized the necessity of observing both sides of the Fed’s dual mandate.
- Early statements from Governor Stephen Milan indicated that the central bank may likely cut interest rates as forthcoming data suggest a push toward easing. He hinted that a rate cut could be justified by 2026, possibly up to 100 basis points.
- The dollar index (DXY) against six currencies rose 0.25% to 98.61, but gold continued its upward trajectory.
- The Eurozone’s HCOB Services PMI for December registered at 52.4, down from preliminary estimates of 52.6 and November’s 53.1.
- Germany’s inflation rate, determined via the Harmonized Index of Consumer Prices (HICP), decreased from 2.6% to 2% year-on-year.
Technical Overview: EUR/USD Drops Below 1.1700
With Tuesday’s drop, the technical outlook for EUR/USD shifted from a neutral to a bearish bias. If it fails to close above 1.1700, downward pressure will likely intensify, given it’s now only 20 pips from the 100-day simple moving average (SMA) of 1.1663.
This means the immediate support for EUR/USD is at the 100-day SMA, followed by 1.1639 and 1.1553 at the 50-day and 200-day SMA, respectively.
To regain a bullish stance, the bulls need to surpass the 20-day SMA at 1.1729 before possibly reaching 1.1750, which would pave the way toward 1.1800.
