EUR/USD Unlikely to Hit 1.1095 Before Fed/ECB Meetings

Global financial markets faced a significant shakeup yesterday, primarily driven by the less-than-stellar July Purchasing Managers Index (PMI) data from the European Monetary Union (EMU). Both the manufacturing and services sectors in the region showed distinct signs of contraction. This negative performance led to a pronounced drop in EMU yields, signaling a growing pessimism among investors.

Germany, one of the leading economies in the EMU, also experienced a fall in its yields. However, the downward trend was reversed during the US trading session, resulting in an eventual rebound. This fluctuation in German yields further underscored the broader economic uncertainty currently faced by the Eurozone.

In stark contrast to the EMU’s performance, the US economy demonstrated resilience. The decline in the US PMI was notably more moderate, with the manufacturing sector even managing to deliver a positive surprise. Despite this, investor sentiment remained cautious. There was a noticeable hesitance to aggressively bid for the US 2-year auction, largely due to the impending Federal Reserve decision on Wednesday.

By the end of the day, US yields had experienced an increase, and US equities had managed to outperform their European counterparts. This divergence in economic activity and yield performance provided a significant boost to the US dollar, particularly against the euro. As a result, the EUR/USD pair experienced a significant drop, closing at 1.1064. Interestingly, despite reporting PMI figures similar to those of Europe, the UK’s sterling managed to slightly outperform the single currency.

Today, Asian markets, with the exception of Japan, are mostly trading positively. This is largely due to indications of additional support measures from Chinese authorities, especially directed towards the property sector. These measures have resulted in a strengthening of both the yuan and the Australian dollar. Meanwhile, US yields and the dollar are currently experiencing a pause after yesterday’s increase, suggesting a momentary consolidation phase.

Investors are now focusing their attention on the upcoming German IFO survey, which is widely expected to confirm yesterday’s poor PMI reading. Additionally, the ECB lending survey will be closely watched ahead of the ECB meeting. Over in the US, consumer confidence is projected to improve. However, given the upcoming Fed and ECB meetings, investors are likely to remain cautious.

In this context, it appears unlikely that the EUR/USD will easily regain the 1.1095 mark before the Fed/ECB meetings. The technical picture for EUR/USD is showing some vulnerabilities, further underscoring the ongoing challenges faced by the pair.