The euro-dollar pair is dominated by optimistic sentiment, despite the negative data on the growth of PMI indices in key European countries. Partly, such price dynamics are associated with the weakness of the US currency (the dollar index continues to decline to the bottom of 96 points), and partly due to encouraging comments from the ECB. The news flow from the UK also provides background support for the euro, thanks to which the EUR/USD pair was able to recover by the middle of the 11th figure.
Although the single currency was under pressure throughout the market after the release of disappointing PMI growth data. The German manufacturing activity index fell even deeper (to 43.4 points), contrary to expectations of low growth. The indicator is below the key 50-point mark since January of this year, which indicates a worsening situation in this sector of the economy. A similar index in France was higher than this target, but still showed a negative trend, dropping to around 50.3 points. In the whole eurozone, the index of business activity in the manufacturing sector reached 45.9 points - this is one of the worst results this year. In the service sector, PMI indices turned out to be slightly better - in Germany, France and the eurozone as a whole, the corresponding indicators showed positive dynamics.
After the publication of the above releases, the EUR/USD bears tried to develop a downward movement in the pair, but the bulls almost immediately seized their initiative. Firstly, the single currency received support from the ECB. So, the head of the National Bank of Austria (and at the same time a member of the Governing Council of the central bank) Robert Holtzman allowed an increase in the interest rate next year - if key economic indicators demonstrate steady growth. But it's worth noting that Holtzman is a consistent hawk - in particular, in September he was one of those who opposed a return to QE, and in October he announced that the ECB should refuse negative rates "as much as possible.'' Therefore, his comments today were perceived accordingly.
But the words of the European Central Bank Vice President Luis de Guindos really surprised the market participants. He stated that recently published macroeconomic data speak of "stabilization of the eurozone economy." Apparently, he had European inflation indicators in mind, as well as ZEW reports published last week. It is noteworthy that the ECB vice president not only "praised" the latest trends, but also once again criticized the ultra-soft measures on the part of the regulator. In his opinion, low rates, firstly, negatively affect the profitability of the banking sector, and secondly, negatively affect the financial stability of the eurozone. Although back in October, he did not rule out a lower interest rate further into the negative area. At the same time, Guindos often recalls the side effects of an extremely soft monetary policy. Let me remind you that back in September, the ECB announced the introduction of a two-tier system for applying the deposit rate. According to the rules of this system, part of deposits placed by banks with the ECB is exempted from the negative rate. According to available information, it was Guindos who was the main lobbyist for the introduction of this system - in his opinion, it will mitigate the negative effects of the latest monetary decisions of the ECB.
Thus, EUR/USD traders have received confirmation that the ECB is likely to maintain a wait-and-see position in the foreseeable future. By and large, Christine Lagarde voiced similar intentions at her first meeting of the ECB (and last this year). This fact makes it possible for traders to ignore weak PMI data in the manufacturing sector, despite the continued decline.
It is also worth noting that the correctional growth of the pair is also due to the weakness of the US currency. The dollar index fell at the beginning of this week after a temporary surge of optimism regarding the temporary truce between the United States and China. And although the parties made concessions to each other, the resolution of the global crisis is still a long way off. In addition, Trump fell under a barrage of criticism from the Democrats - according to them, the American president created a global crisis in his own way, provoking a trade war with China, and now can not cope with the consequences of his steps. Dollar bulls were not inspired by the completion of the first phase of the negotiation process. Obviously, the most complex and fundamental issues of a strategic nature will be discussed in the framework of the second stage of negotiations. And given the upcoming US presidential election (November 2020) and Trump's stable rating gap from Joe Biden, it can be assumed that the Chinese will not rush to conclude a deliberately disadvantageous agreement.
Such prospects put background pressure on the dollar, especially in light of the dual position of the Federal Reserve. Jerome Powell at the December meeting made it clear that in general, the regulator intends to pause the process of lowering the interest rate, but "if necessary" is ready to return to this issue. In this context, today's manufacturing PMI in the US put additional pressure on the greenback, as it ended up in the red zone (weak growth to 52.5 points).
Given the current reaction of the dollar to this release, it can be assumed that the indicator of production in the US processing industry (release scheduled for tomorrow, December 17) will provoke no less volatility. For two months (September and October), the indicator was in the negative area, but this time, analysts are optimistic - according to general expectations, in November it will recover to 0.8%. If the indicator remains in the negative zone, the EUR/USD pair will get another reason for its correctional growth to the nearest resistance level of 1.1200 (the upper line of the Bollinger Bands indicator on the weekly chart).
The material has been provided by InstaForex Company - www.instaforex.com