The EUR/USD continued to strengthen after the release of robust German and Eurozone PMI reports.
The Eurozone Manufacturing PMI came in at 43.8 in November, beating expectations of 43.4. The bloc’s Services PMI also rose to 48.2 in November compared with the consensus reading of 48.1.
The euro also strengthened after the release of the preliminary business activity report from the HCOB survey which showed that Germany’s manufacturing and services sectors improved in November. This has raised hopes that the recession in the Eurozone’s largest economy could be shallower than expected.
The dollar weakened following dovish expectations that the Federal Reserve (Fed) is done hiking rates, which in turn has helped support the EUR/USD.
Eurozone and German PMI
According to the latest figures from the HCOB’s latest purchasing managers index survey which was out on Thursday, the Eurozone manufacturing and services sectors contracted less in November. The Eurozone Manufacturing Purchasing Managers Index (PMI) increased to 43.8 in November, from the 43.4 reading that was expected and was above October’s reading of 43.1. The index reached a six-month top. The Eurozone Services PMI climbed to 48.2 0 in November from 47.8 in October, reaching a two-month high, and above the 48.1 consensus.
The HCOB Eurozone PMI Composite was higher at 47.1 in November compared with the estimated reading of 46.9 and October’s 46.5 number. The index hit a two-month high.
The German PMI prints boosted the euro as the preliminary business activity report from the HCOB survey showed that Germany’s manufacturing and services sectors performed better in November, easing fears of a deeper economic downturn.
Expectations that the Fed is done raising rates weigh on USD
The USD Index (DXY), which tracks the US dollar against a basket of currencies, remained weak as markets don’t expect the Fed to continue with its interest rate hiking cycle. The market is currently pricing more than 50% chance that the Fed will cut rates by May 2024. With the US Treasury bond yields lower, the greenback experienced further downward pressure which in turn has lifted the EUR/USD pair.
ECB’s hawkish tone supports the EUR
On the other hand, the European Central Bank (ECB) President Christine Lagarde’s hawkish remarks earlier this week have strengthened the possibility of an additional near-term appreciation of the euro. Lagarde has encouraged market participants and boosted the possibility of further rate hikes, after she said at an event in Berlin that it was too early to declare victory over inflation. She explained that it was premature to base speculations on short-term data, which has now forced investors to scale back their expectations of a rate cut by the ECB.
It will now be interesting to see whether the EUR/USD will strengthen further, especially considering that Thursday is a US Thanksgiving holiday. The inactivity and thin US market conditions could magnify movements in the currency market.