On Thursday, the euro paid the price for the weaker-than-expected French and German PMI data, which showed that the eurozone economy is slowing down. This drove traders to trim the expected hikes in the interest rate by the European Central Bank (ECB). In contrast, there was a rise in the US dollar against a basket of other currencies, as risk appetite was down. Recession worries also saw the demand for safe-haven US government bonds go up.
The Economy is Slowing Down
The manufacturing goods’ demand in June in the euro zone slowed down because of higher prices. This slowdown is the fastest to be seen in the last two years. A similar trend had been seen in May 2020, when the coronavirus pandemic was reaching its peak. The factory Purchasing Managers’ Index (PMI) by the S&P Global declined from 54.6 to low of two years to 52.0.
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Currency analysts said that this had resulted in the fall of the euro and the rise in the dollar. Plus, they added that the strengthening of the US dollar was likely to continue, as recession fears would continue to increase. After the data was released, bets of interest rate hikes of 30 basis points were priced in for July by the European Central Bank.
On Monday, these bets had been around a hike of 34 basis points. Likewise, there was also an adjustment in expectations of the total rate hike to be expected by the end of the year. It went from 176 basis points to 161 basis points. On Thursday, S&P Global also disclosed that the PMI Output Index in the US that keeps track of the services and manufacturing sector had also declined in June to 51.2, while it had been 53.6 in May.
If the reading is above 50, it shows that the private sector is growing. The flash composite order index also recorded its first decline since July 2020, as it came down to 47.4 in June, while May had seen it close at 54.9.
The Euro Declines
There was a 0.5% decline in the euro, as it came down to $1.0509. The currency had pushed below the $1.05 level earlier, which happened for the third time in the current week. The single currency has also recorded a decline against the Japanese yen of about 1.4%, which brought it to 141.85 yen.
The dollar had also been trading lower but was pulled up by the euro’s fall. The cautious comments of Jerome Powell, the US Federal Reserve chairman, saw the greenback enter positive territory once more. There was a 0.3% increase in the US dollar index, which took it to 104.48.
While a 75 basis points rate hike is expected from the US Fed in July, markets are pricing in a softer rate hike by the European Central Bank as well as the Bank of England. During his testimony on Wednesday and Thursday, the Fed chair said that recession was a possibility, but the central bank was committed to fighting inflation.
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