Weak Eurozone PMI Prices Weigh on Euro

Kenneth Bruce from Société Générale and colleagues point to disappointing Eurozone PMI price data and the dovish remarks from European Central Bank (ECB) President Lagarde as major factors influencing the EUR/USD pair. They identify the 1.13 level as critical, with support seen around 1.1390 and 1.1350. The widening UST/EGB spreads over the past two years, along with some technical indicators, suggest the euro could weaken further against the dollar.

Pressure on Euro from Subpar PMI Prices

“Inflation worries in the eurozone? The 1.13 mark seems pivotal for EUR/USD.”

S&P Global noted that input costs surged again, although overall inflation has dropped to its lowest levels since February, just prior to the onset of the Middle East conflict. While inflation remains high, particularly in production, it appears to be moderating compared to service sectors.

“This context lends further weight to President Lagarde’s comments, which effectively led to the euro being marked as the weakest G10 currency over the past day, while the Bund curve experienced a bullish steepening. ECB communication has often faced scrutiny, and Lagarde’s recent tone comes off as less aggressive than what Chief Economist Lane expressed last week.”

“We aren’t overly optimistic. It might take a while for the impacts of recent developments to materialize, but the case for a second rate hike has strengthened over the last 24 hours. The decline in PMI prices should reinforce that sentiment.”

“Regarding EUR/USD, we are monitoring for any breakout attempts in the two-year UST/EGB spread above 160bp (currently at 163.7bp). A retest of 1.1411 seems likely, although technical readings are tightening. If the euro drops below 1.1390, we might see momentum shift towards the 1.1350 region.”

“Strong support is at 1.1345, while resistance stands at 1.1475.”