The EURUSD currency pair weakened to near 1.0830 on Wednesday, as the preliminary Eurozone Hamburg Commercial Bank (HCOB) Purchasing Managers’ Index (PMI) report for July showed that composite numbers unexpectedly eased due to a slowdown in activities in the manufacturing and services sectors.
The HCOB Composite PMI decreased to 50.1, just above the 50 threshold that separates expansion from contraction. Investors had expected the Composite PMI to expand at a faster pace to 51.1 from the former release of 50.9. The HCOB Manufacturing PMI contracted to 45.6, while the Services PMI expanded at a slower pace of 51.9.
Comments by Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, on the flash PMI indicated that weak demand in the Eurozone’s largest economy has weighed heavily on the manufacturing sector. “French service providers increased their business activity in July due to the preparation for the Olympic Games. In contrast, demand in the German manufacturing sector seems to have dragged down overall private sector output,” said De la Rubia.
Economic Implications and Market Reactions
The Eurozone’s weak economic activity is expected to boost expectations of more rate cuts by the European Central Bank (ECB). However, price data didn’t offer any relief to ECB policymakers. According to the preliminary PMI report, input prices in the services sector increased at a faster rate, and selling prices rose at a pace similar to the previous survey period.
Currently, traders see the ECB delivering two more rate cuts this year. Also, a few ECB officials see market expectations of two more rate cuts as appropriate.
The US Dollar is moving higher amid risk aversion that Donald Trump will be victorious in the November presidential elections and the uncertainty ahead of the Personal Consumption Expenditures Price Index (PCE) data for June, which will be published on Friday.
The DXY Dollar Index, which tracks the greenback’s value against six major currencies, posted a fresh weekly high at around 104.50, as expectations for Trump’s return to power rose after an assassination attack on him. Meanwhile, Democrats nominated Vice President Kamala Harris to challenge the Republicans.
On the economic front, investors will keenly focus on the US core PCE inflation data as it would provide fresh cues about when the Federal Reserve will start reducing interest rates. The report is expected to show that core PCE inflation, the Fed’s preferred inflation measure, decelerated to 2.5% from May’s figure of 2.6%, with monthly figures growing steadily by 0.1%.
The scenario in which price pressures decline expectedly or at a faster pace will boost expectations of early rate cuts by the Fed. On the contrary, stubborn figures would weaken rate-cut bets. According to the CME FedWatch tool, 30-day Federal Fund futures show the central bank will begin lowering its key borrowing rates from their current levels in the September meeting.
