After reaching 2.5-year peaks, the USD index turned sharply to decline amid the release of disappointing data on manufacturing activity in the United States.
The ISM's PMI in the US manufacturing sector fell to 47.8 in September from 49.1 in August. The rate has reached its lowest level in more than a decade.
After the publication of a weak report on business activity in the US manufacturing sector, the head of the White House, Donald Trump, had another reason to criticize the Federal Reserve, and the latter to lower the interest rate. The US president has already taken advantage of it. He said Fed Chairman Jerome Powell and his colleagues allowed the greenback to strengthen so much that it negatively affected US manufacturers. Only time will tell whether the Federal Reserve will resort to weakening monetary policy. Following the release of the ISM manufacturing index, the chances of the Fed cutting interest rates in October rose from 40% to 65%. It seems that investors are confident that the cycle of monetary expansion in the United States will continue.
At first glance, there is no reason to panic, since the US manufacturing sector accounts for only 11% of the country's GDP and 8.5% of employment, but transport services, warehouses and retail trade depend on production. Given these relationships, the Wall Street Journal estimates the contribution of manufacturing to US GDP at 30%.
Obviously, the US economy is slowing down because of the trade wars, forcing analysts to think about how slowly it can grow without sliding into a recession.
Growth of less than 2% earlier almost guaranteed a reduction in the future. Now, some economists believe that this indicator may fluctuate around 1% -1.5%, not necessarily portending a recession.
According to the head of the Federal Reserve Bank of Chicago Charles Evans, a 50% reduction in the federal funds rate will ensure a 2.25% GDP growth this year, 2% inflation over the next few years and unemployment slightly below 4%. Bloomberg analysts expect the US economy to expand 2.3% this year.
However, weak data on business activity in the United States cast doubt on these figures. If the global index of purchasing managers has been below the critical level of 50 for the fifth month in a row, then the American counterpart is only the second. While many countries have already adapted to trade wars, the United States is only beginning to sense their negative effects. This may be a bullish factor for EUR/USD.
Thus, if the Federal Reserve used to cut the interest rate due to international risks, which were evidenced by investors' flight into safe haven assets and a decrease in the yield of treasuries, now the regulator has an internal argument for easing monetary policy. Given the split in the ranks of the ECB Governing Council and the limitations of its "arsenal", the rebound of the EUR/USD pair from support at 1.0875-1.0885 seems quite logical. The bulls will be able to continue the attack in the event of the release of weak statistics on the US labor market in September. According to forecasts, the US economy created 147 thousand new jobs in the first month of autumn, which is 17 thousand more than in August. However, the publication of the ISM manufacturing index reinforced concerns that actual numbers would not reach forecast estimates. Another factor in support of the euro may be reaching an agreement between the UK and the EU on the terms of Brexit, but this still remains a big question.
The material has been provided by InstaForex Company - www.instaforex.com