**EUR/USD Rises As Eurozone Data Brightens; Dollar Dips After Fed Signals Rate Pause**
*By Joyce Chen, Mitrade*
The euro gained ground against the US dollar in early Thursday trading, buoyed by a brighter Eurozone economic outlook, while the dollar slipped as US Federal Reserve officials reaffirmed their bias towards holding interest rates steady for the foreseeable future. Market attention now shifts to upcoming US labor data, which could provide more clarity on the currency pair’s direction.
**Eurozone Optimism Lends Support to Euro**
The EUR/USD pair advanced in the Asian session, rising as much as 0.3% to trade near 1.0880. The euro’s recovery comes after recent softness, supported by encouraging economic indicators and a tentative shift in market sentiment regarding the euro area.
Key Eurozone factors underpinning the euro included:
– **Improved Economic Data**
– The final reading of the Eurozone’s Composite Purchasing Managers’ Index (PMI) for August was revised higher to 52.3, compared to the preliminary flash estimate of 52.0. This marks the fastest expansion in 15 months, according to S&P Global, and points to a continued recovery in services and manufacturing activity.
– Germany’s factory orders and retail sales also surprised markets to the upside. Factory orders rose by a solid 2.1% in July, signaling robust industrial demand. Retail sales growth, while moderate, indicated more resilient consumer sentiment than previously anticipated.
– **Reduced Stagflation Concerns**
– Despite ongoing challenges from elevated energy costs and sluggish global demand, the risk of stagflation in the common currency bloc appears to have lessened. The European Central Bank’s latest communications emphasized that inflation is on track to return towards its 2% target by mid-2025, reducing concern about further aggressive rate hikes.
**ECB Policy Outlook Limits Euro Gains**
While positive data has supported the euro, traders remain cautious in pushing the currency much higher against the dollar, given the European Central Bank’s dovish undertone.
– **Interest Rate Outlook**
– The ECB, following its July meeting, has signaled that the deposit rate at 4.25% may already represent the peak for this cycle. Policy makers are wary of overtightening, as growth is only just showing signs of stabilization.
– ECB President Christine Lagarde has repeatedly stressed a data-dependent approach, leaving the door open for policy flexibility. The prospect of rate cuts in the first half of 2025 remains on the table as inflation pressures gradually recede.
– **Market Sentiment**
– Positioning in the euro remains underweight as investors weigh Eurozone growth risks against the potential for further US economic outperformance.
**US Dollar Softens After Fed Signals Pause**
The US dollar index (DXY), which measures the greenback’s value against a basket of six major currencies, retreated to 104.57, shedding 0.2% at the start of trade in Europe. The pullback followed dovish signals from several Federal Reserve officials, who indicated patience in adjusting monetary settings.
Key US developments driving dollar moves included:
– **Fed Officials Reiterate Hold**
– Recent speeches from Fed Governors including Christopher Waller and John Williams highlighted that current monetary conditions are sufficiently restrictive to bring inflation towards the central bank’s 2% target. Officials have reinforced a wait-and-see stance, reducing market odds of further hikes in 2024.
– The latest Beige Book survey also pointed to “moderate” economic growth and some cooling in the labor market.
– **Weakened Labor Market Signals**
– July’s job openings fell to a three-year low, with the Job Openings and Labor Turnover Survey (JOLTS) showing evidence of softening hiring appetites among US employers. Initial jobless claims figures, however, have not yet shown a sharp rise, indicating that layoffs remain contained.
– **Interest Rate Futures
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