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Euro Holds the Line Despite Expected Contraction in PMIs
Tuesday saw the euro holding steady, with the North American trading session seeing EUR/USD at 1.0866, a minor 0.15% decrease.
Projected Contraction in Eurozone and German PMIs
The journey towards economic recovery appears long and arduous for the eurozone. PMIs of manufacturing and services, which are reliable economic indicators, paint a challenging picture. Both the broader eurozone and Germany, its largest constituent economy, are facing the possibility of ongoing contraction in their manufacturing and services sectors — marked by PMIs below 50. The expectation is that the trend will continue, with December's PMIs, due on Wednesday, predicted to stay in the contraction zone.
Lagarde's Changing Stance and Market Reaction
ECB President Lagarde adopted a hardline stance in December's meeting, pushing back against talks of imminent rate cuts. She suggested the possibility of a rebound in inflation and denied discussions on rate cuts. However, recently at Davos, Lagarde admitted probable rate cuts by the summer. Although the markets have anticipated 140 basis points worth of cuts this year, ECB members are urging cautious optimism. All eyes will be on the ECB’s meeting this Thursday, focusing on ECB’s rate statement and Lagarde’s subsequent press conference.
Fed's Rate Cut Optimism Fading
Enthusiasm surged in December as Fed Chair Powell seemed amenable to rate cuts. This optimism has since been tempered, with a March rate cut becoming more uncertain. The likelihood of a quarter-point cut in March, previously set at 75%, is now only 42%, as indicated by the CME’s FedWatch tool. Fed members have been expressing skepticism on a March cut, and instead talked of two or three cuts this year — contrasting sharply to the market’s six cuts anticipation. Despite this, consistent strength in US economic data means the Fed can afford to take its time with rate cuts.
