Investors are reacting to the recent PMI survey that showed slowing activity in the Euro area causing the EUR/USD to steady near its seven-week low. Meanwhile, the U.S. dollar rose slightly for the second consecutive session on Tuesday due to the growing expectations that U.S. interest rates will continue to stay high and despite market anxiety surrounding discussions of the debt ceiling.
EUR/USD down following Flash PMI Surveys
Following mild gains in the recent sessions, the EUR/USD is now turning downward due to mixed results from preliminary PMIs for Germany and the Eurozone in May.
The euro decreased by 0.32%, reaching $1.07769, and it has experienced a 2% decline so far this month against the US dollar, which has grown stronger. This is a reversal of its two-month streak of gains.
The business activity growth in the Eurozone decreased more than expected in May. This was mainly because of a slower expansion in the service sector and a considerable drop in manufacturing output, according to flash PMI surveys released today.
Although the manufacturing sector is struggling, the services industry is continuing to perform well and is expected to do remain so.
Output from German factories has declined significantly, marking the largest contraction in three years.
The European Central Bank is still expected to keep raising interest rates throughout the year.
Isabel Schnabel, a member of the ECB board, highlighted the significance of the central bank’s resolute efforts to fight inflation. Meanwhile, Christine Lagarde, the President of the ECB, ensured that appropriate actions would be implemented to tackle price increases.
On Monday, ECB policymaker Pablo Hernández de Cos stated that in order to achieve its medium-term goal of 2% inflation, the European Central Bank needs to increase its interest rates further.
ECB is scheduled to meet on Jun 15, a 25 bps rate hike is fully priced in.
USD marches higher on rate outlook
The USD rose further on Tuesday as risk sentiment remained on the downside due to the ongoing debt ceiling impasse. Additionally, comments from Fed officials that were perceived as hawkish also contributed to the dollar’s gain.
The US Dollar Index (DXY), which gauges the USD’s strength against a basket of six major rivals, is nearly 0.3% up at 103.5, holding up near its 2-months peak.
Despite ongoing discussions around the debt ceiling, the dollar index held steady at 103.3 thanks to growing confidence that the Federal Reserve will keep interest rates high. Traders are still awaiting updates on the progress of governmental discussions.
On Monday, discussions between U.S. President Joe Biden and House Speaker Kevin McCarthy regarding the U.S. government’s $31.4 trillion debt ceiling ended without an agreement. Although there are worries of a possible US default by June 1, both parties have stated that they are cautiously optimistic about reaching an agreement to increase the debt ceiling. Treasury Secretary Janet Yellen has also brought attention to the risk of default.
The United States government may face a default in less than two weeks, which could cause turbulence in the financial markets. As a result, some investors have sought the safety of the dollar, which is typically seen as a secure asset during times of economic uncertainty.
Central bank officials’ comments suggesting a possibility of a rate hike in June contributed to the greenback’s boost.
Check also: FX Outlook 2023
Several influential members of the Federal Reserve suggested on Monday that the central bank may need to continue tightening monetary policy.
According to Minneapolis Fed President Neel Kashkari, the U.S. may need to raise rates to more than 6% for inflation to reach the Fed’s target of 2%. Meanwhile, St. Louis Fed President James Bullard suggested that the central bank may need to increase rates by another 0.5% later this year.
Investors are now less likely to expect interest rate cuts this year, predicting that the rates will stay steady at approximately 4.7% until December.
