The EUR/USD pair started the trading week on a calm note. The bears were in control in the first half of the day. However, it's not entirely accurate to speak of an initiative in this context since the price rises and falls within the 8th figure. Last week, the bears tried to push the price below the 1.0800 target, while the bulls attempted to reach the borders of the 9th figure, but both efforts were in vain. The pair continues to fluctuate within the eighth figure for the third consecutive week, which shows how indecisive traders are. In my opinion, it is normal for both sides to be cautious, considering the upcoming events.
I would like to remind you that the EUR/USD pair strengthened on Friday due to two factors: first, the rise in inflation in the eurozone, and second, the stagnant core personal consumption expenditures (PCE) index. The Eurozone core inflation accelerated for the first time since last July (reaching 2.9% year-over-year). Prior to this, the indicator had been steadily declining for nine months. The CPI also landed in the "green," rising to 2.6% year-over-year, compared to the forecasted increase to 2.5%.
This report provided substantial support to the euro, especially since a wage indicator was published, which also helped the single currency: the Euro area negotiated wages increased at an annual pace of 4.69% in Q1 2024, following a 4.50% rise in Q4.
In turn, the dollar reacted negatively to the crucial inflation indicator closely monitored by Federal Reserve members. The core PCE index remained at 2.8% in April. This level was also seen in March and February, and previously in April 2021. The fact that this key inflation indicator has been stagnant is mounting pressure on the dollar bulls. The complexity of the situation is compounded by the current "blackout period," during which no Fed members can comment on the situation. We will only hear their opinions on the core PCE index after the results of the Fed's June meeting are announced, which will be next Wednesday.
The EUR/USD correction on Monday was triggered by revised PMI data for the manufacturing sector in Germany, France, and the eurozone. The final estimates were expected to match the initial ones, but almost all components of the release ended up in the "red." Specifically, the French manufacturing PMI came in at 46.4, whereas the initial estimate was 46.7. The overall eurozone index was also revised lower (47.3, initially at 47.4). Although the indicators slightly declined from the initial estimates, this exerted background pressure on the euro, especially since all the indices have been in contraction territory for many months.
The report made it possible for the bears to test the daily low, reaching the 1.0830 mark (the middle line of the Bollinger Bands indicator on the daily chart), but they couldn't build on their success. In the second half of the day, the bulls took the initiative due to the dollar's broad weakness. The greenback came under pressure again after the release of the ISM Manufacturing Index. Last month, this indicator put significant pressure on the dollar as it unexpectedly entered contraction territory. Instead of the expected rise to 50.4, it fell to 49.2. Before the latest release, experts had forecasted positive dynamics, expecting the index to rise to 49.8 in May. Some analysts even predicted a more substantial increase to 50.3 (a return to the expansion territory). However, the index fell to 48.7. So instead of the expected growth, the indicator plunged further into the contraction territory. This downward trend has been recorded for the second consecutive month. In addition, the index of new manufacturing orders dropped to 45.4, against a forecasted rise to 49.4 and a previous value of 49.1.
The consistent two-month decline of the ISM Manufacturing Index is a warning sign for the greenback. It is another argument in favor of a Fed interest rate cut at the September meeting. Although the outcome of the September meeting will largely depend on the dynamics of inflation and the labor market, the downward trend of the ISM indices could also play a role. Not a decisive one, but still significant.
In a response to the report, the EUR/USD pair jumped to the boundaries of the 1.09 level but is (for now) still trading below the 1.0900 target. This is an important nuance because traders should only consider long positions on the pair once the price consolidates above the resistance level of 1.0920 (the upper line of the Bollinger Bands indicator on the D1 timeframe). If the bulls refuse to leave the 1.08 level, we do not recommend entering long positions— the risk of a downward pullback is too high.
