The stronger-than-expected U.S. Purchasing Managers' Index (PMI) gives a different impression than the recent weak U.S. economic data. In reality, of course, this doesn't really matter, because the U.S. economy is slowing 100% of the time and is 100% certain to fall into recession.
However, we see that rate hike expectations have now increased slightly, which means that investors are now closer to reality again. The Fed will not announce a dovish turnaround any time soon, as the risks of inflation flaring up again are too high.
We see low trading volume and volatility - although in the FX markets, the latest PMI data from Germany, France, the eurozone and the U.S. (today) caused some reassessment. Surprisingly positive PMI data, which also showed an increase in demand in the U.S. - in contrast to other recent economic data. Average prices for goods and services rose at the fastest pace since September 2022 - which may explain why recent core inflation data (in the US) has been so stubborn.
I expect rate hike expectations in the U.S. to rise again and Fed officials to continue to reiterate that the current monetary policy stance needs to be extended for a while longer to bring prices down.
European PMI data also came in better than expected due to a strong services sector. However, the manufacturing sector showed weakness - a sign of a slowdown. I expect German sentiment data (business climate) on Monday to be worse than the relatively positive expectations.
The EUR/USD is certainly bullish in the medium and long term, but in the short term I expect the EUR/USD to retest the current 1.09100 - 1.09400 bottom range. We are also seeing higher US Treasury yields today which will provide some support to the USD.
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