The Euro recovered from earlier losses against the US Dollar on Friday, buoyed by unexpectedly strong business activity data from the Eurozone. The EUR/USD pair climbed back towards the 1.1615 level but remains confined within a narrow trading range as investors await critical inflation figures from the United States.
The positive economic signals from Europe provide a temporary lift for the common currency, but the market's next major move likely hinges on the upcoming US Consumer Price Index (CPI) report, which will heavily influence the Federal Reserve's monetary policy decisions.
Key Takeaways
- The Eurozone's HCOB Services PMI for October reached a 12-month high at 52.6, surpassing expectations.
- The Manufacturing PMI stabilized at 50.0, avoiding a feared contraction and beating forecasts.
- Stronger data from Germany, particularly in the services sector, provided additional support for the Euro.
- The EUR/USD currency pair continues to trade in a tight range between 1.1580 and 1.1620.
- Market attention is now firmly on the US CPI inflation data, expected to show an acceleration to 3.1% year-on-year.
European Business Activity Exceeds Forecasts
A series of positive economic reports from the Eurozone on Friday painted a picture of unexpected resilience. The preliminary HCOB Purchasing Managers' Index (PMI) data for October showed a significant improvement in business conditions, defying market predictions of a slowdown.
The services sector was a standout performer. The HCOB Services PMI for the Eurozone jumped to 52.6 from 51.3 in September. This reading was not only well above the consensus forecast of 51.1 but also marked the strongest rate of expansion in the services industry in the last twelve months.
The manufacturing sector also delivered a positive surprise. The HCOB Manufacturing PMI came in at 50.0, a level that indicates stabilization rather than the contraction economists had anticipated. The market consensus was for a decline to 49.5 from September's 49.8 reading.
Understanding PMI Data
The Purchasing Managers' Index (PMI) is a key leading indicator of economic health. A reading above 50.0 suggests expansion in the sector compared to the previous month, while a reading below 50.0 indicates contraction. These figures are closely watched as they often provide an early glimpse into future trends for GDP, employment, and inflation.
German Economy Provides a Boost
Earlier in the day, data from Germany, the Eurozone's largest economy, set a positive tone. The German Services PMI showed a powerful acceleration, rising to 54.5 from 51.5 in September. This result significantly outpaced expectations of a slight dip to 51.0.
Germany's manufacturing sector also showed a slight improvement, with the PMI edging up to 49.6 from 49.5. While still in contractionary territory (below 50.0), the figure was better than feared and contributed to the overall positive sentiment surrounding the Euro.
Market Focus Shifts to US Inflation
Despite the encouraging data from Europe, the Euro's gains were limited. The US Dollar held its ground within recent ranges, benefiting from a cautious market mood fueled by ongoing trade tensions. Investors are now turning their full attention to the release of the September US Consumer Price Index (CPI).
Economists expect the headline annual inflation rate to have accelerated to 3.1%, up from the 2.9% reading in August. The monthly increase is projected to be a steady 0.4%. These figures will be critical in shaping expectations for the Federal Reserve's upcoming monetary policy meeting.
Federal Reserve Rate Cut Expectations
Market participants are almost fully pricing in a rate cut from the US central bank. According to the CME Group's FedWatch tool, there is a 98.9% probability of a 25-basis-point interest rate reduction at the Fed's next meeting.
While a rate cut is widely anticipated, a higher-than-expected inflation number could complicate the Fed's future path. It might temper expectations for further aggressive easing, potentially providing support for the US Dollar.
EUR/USD Technical Outlook
From a technical standpoint, the EUR/USD pair remains locked in a well-defined range. Price action has been contained between the support level at 1.1580 and the resistance area around 1.1620.
The pair is still trading within a broader descending channel, indicating that the medium-term trend remains tilted to the downside. Rallies have consistently found sellers near the top of this channel.
Key Levels to Watch
- Immediate Support: The 1.1580 level is the first line of defense for buyers. A confirmed break below this could open the door to further losses, targeting the lows seen earlier in October around 1.1545.
- Further Support: Below 1.1545, the psychological 1.1500 level comes into view as a potential target for sellers. The bottom of the descending channel is currently located around 1.1450.
- Immediate Resistance: On the upside, the 1.1620 area, which marks Thursday's high and coincides with the channel top, is the key hurdle for bulls to overcome.
- Further Resistance: A successful breach of 1.1620 would shift the focus to higher levels, with the October 21 high around 1.1650 and the October 17 peak at 1.1728 acting as the next significant resistance points.
Technical indicators on shorter-term charts, such as the 4-hour chart, are pointing lower, with the Relative Strength Index (RSI) struggling to climb back above the neutral 50 mark. This suggests that bearish pressure persists, though a fundamental catalyst like the US CPI data is needed to trigger a decisive breakout from the current range.
