The EURUSD currency pair was trading down over 65 pips as the US dollar rallied against the euro to erase a significant chunk of yesterday’s gains that followed the ECB’s interest rate decision. This comes after the currency faced resistance at the high recorded in November. The decline in the value of the Euro is attributed to disappointing business activity data from the Eurozone, which has led to scepticism about the European Central Bank’s (ECB) assertive stance.
EURUSD Pair Falls As Euro Weakens on Disappointing PMI Data
The Preliminary HCOB Services PMI for December dropped to 48.1, a decline from November’s 48.7, defying expectations of a slight rise to 49. This indicates that the activity in the Eurozone’s crucial services sector is shrinking more rapidly than it did in the previous month.
Similarly, the Manufacturing PMI remained static at 44.2, contrary to market forecasts of a slight increase to 44.6. A PMI figure below 50 denotes a contraction.
These statistics cast doubt on the strength of the contributions from the services and manufacturing sectors to the Eurozone’s GDP. Consequently, this fuels uncertainty regarding the ECB’s capability to maintain high interest rates over an extended period.
This concern comes despite ECB President Christine Lagarde’s commitment to sustaining elevated rates, as expressed in the monetary policy meeting on Thursday.
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During the ECB meeting on Thursday, the central bank countered the market’s expectation of significant rate reductions, amounting to nearly 150 basis points, in 2024. ECB President Lagarde emphasised that interest rates would be maintained at sufficiently high levels for an extended period to achieve the inflation target of 2%.
She also clarified that the governing council had not planned a rate-cut schedule yet. Considering the increasing likelihood of a recession in the Euro Area and the continued decrease in inflation, the ECB might have to reconsider its stance on interest rates.
This shift could lead to the central bank preparing the market for a series of rate reductions in the coming year. Financial markets are already factoring in the likelihood of around five rate cuts of 25 basis points each in 2024.
