EUR/USD sinks to near two-year lows as preliminary Eurozone PMI contracts – FXStreet

• EUR/USD fell sharply as the US dollar strengthened and the Eurozone Composite PMI unexpectedly contracted.
• The Eurozone Services PMI surprisingly fell to 49.2, suggesting business activity contracted in November for the first time since January.
• The dollar strengthened as traders questioned the Fed's rate cut in December.

EUR/USD hit a nearly two-year low near 1.0330 in European trading on Friday, before recouping some of its intraday losses. Still, the outlook for major currency pairs is fragile, with preliminary HCOB Eurozone Purchasing Managers' Index (PMI) figures for November showing an unexpected contraction in overall business activity. The euro zone composite PMI fell to 48.1, but economists had expected the economic indicator to manage to stay near the borderline of 50.0. A value below the standard of 50.0 is considered a reduction in economic activity.

The large drop in overall private business activity was due to the slump in the services PMI, which also contracted unexpectedly. The Services PMI, which measures service sector activity, fell to 49.2 from the expected 51.8 and the previously announced 51.6. Service sector production fell for the first time since January.

The manufacturing PMI continued to contract, with the index falling at a faster-than-expected pace to 45.2, compared to the expected and previously announced 46.0.

A majority of European Central Bank (ECB) officials are already concerned about slowing economic growth and potential economic risks from an expected trade war with the United States. ECB chief economist Philip Lane warned on Thursday that a global trade war due to President-elect Donald Trump's possible implementation of tariff hikes would result in a “substantial” loss of global economic output. “Trade fragmentation involves significant production losses,” Lane said.

Meanwhile, Cyprus Central Bank Governor Christodoulos Pasalides said, “If trade restrictions materialize, the result could be inflation, recession or even worse, stagflation.'' Reuters reported.

Traders believe there is a more than 50% chance that the ECB will cut deposit facility rates by 50 basis points to 2.5%. Before the PMI data was released, the probability of a significant rate cut was less than 20%.

Daily Digest Market Movement: EUR/USD plunges as US dollar rebounds

• EUR/USD is facing a heavy sell-off as the US dollar (USD) expands its bullish momentum near two-year highs and the US dollar index (DXY) rises to near 108.00.
• The outlook for the US dollar is positive as market participants expect the Federal Reserve to cut interest rates less than originally expected in the current policy easing cycle.
• Market participants expect U.S. inflation and economic growth to accelerate once President-elect Donald Trump takes office. His economic package includes tax cuts and a 10% increase in import duties, with the exception of the eurozone and China, which are expected to face exceptions. A higher mission.
• Higher import duties and lower taxes will increase demand for labor and domestically produced goods and services, as well as business investment. This is a scenario in which inflation occurs and the Fed remains cautious about cutting interest rates.
• The impact of the hot inflation outlook is reflected in market speculation about the Fed's interest rate policy at its December meeting. The probability that the Fed will cut interest rates by 25 basis points (bp) to a range of 4.25% to 4.50% fell to 56% from 70% a month ago, according to the CME FedWatch tool.
• Going forward, investors will be paying close attention to the preliminary US S&P Global PMI figures for November, which will be released at 2:45 pm Japan time. The PMI report is expected to show that overall business activity expanded at a faster pace due to improved output in the manufacturing and services sectors.

Technical analysis: EUR/USD test area below 1.0350

EUR/USD extended its decline and reached a two-year low near 1.0330 on Friday. The major currency pair fell further after falling below the previous day's psychological support of 1.0500. The pair is likely to witness further downside as all short- to long-term exponential moving averages (EMAs) are falling.

The 14-day Relative Strength Index (RSI) is hovering in a bearish range of 20.00 to 40.00, providing evidence of further weakness in the near term.

Looking down, EUR/USD bottomed at 1.0332 on Friday. If this level fails to hold, the pair may find a cushion around the round level support at 1.0300. On the contrary, the psychological level of 1.0500 and the November 20 high of 1.0600 will be important barriers for euro bulls.

(This article was amended on 22 November at 09:55 GMT to add 'plunge' to the first bullet point.)