Title: US PMI Surprises to the Upside, Weighs on EUR/USD
Original Author: XTB Market Analysis Team
Source: XTB Market News and Research
Original Article Link: https://www.xtb.com/int/market-analysis/news-and-research/breaking-us-pmi-above-expectations-eurusd-declines
In a key development for currency and equity markets, the United States reported stronger-than-expected Purchasing Managers’ Index (PMI) data, which had a notable impact on the US dollar and the EUR/USD currency pair. The latest PMI readings from S&P Global indicate continued economic expansion in the world’s largest economy, reinforcing the resilience of US growth despite ongoing concerns over inflation, monetary policy, and global demand.
The positive US PMI release supports the narrative of a robust US economy, suggesting that consumer and business activity remain solid and that the Federal Reserve might remain on a hawkish footing for longer than previously anticipated. Let’s take a comprehensive look at the latest data, market reactions, and the broader implications for the forex market.
Key Highlights from the Report:
– S&P Global US Composite PMI for May 2024 rose to 54.4, above expectations
– Manufacturing PMI reached 50.9, signaling a return to expansion territory
– Services PMI remained strong at 54.8, suggesting upbeat consumer demand
– Immediate impact on EUR/USD reflected a sharp decline, nearing session lows around the 1.0830 level
– The US dollar saw broad-based strength following the data release
– Yields on US Treasury bonds edged higher, supporting the dollar’s advance
PMI Data Breakdown
The Purchasing Managers’ Index (PMI) is a critical leading indicator of economic health, compiled from surveys of businesses across various sectors. A reading above 50 suggests expansion, while a reading below 50 implies contraction. The recent data showed:
– US Services PMI: 54.8 (forecast: 51.3; previous: 51.3)
– US Manufacturing PMI: 50.9 (forecast: 50.0; previous: 50.0)
– US Composite PMI: 54.4 (no formal consensus forecast)
The significant upside surprise in both services and manufacturing PMIs points to growth in both segments of the economy. Notably, the services sector maintained its dominance, with levels suggesting continued strength in consumer-facing industries, travel, hospitality, and healthcare.
Manufacturing moved back into expansion territory for the first time in several months, suggesting some normalization in supply chains and a more favorable demand environment for US-produced goods.
Market Reaction and Implications for EUR/USD
The foreign exchange markets reacted quickly to the stronger PMI report, with the US dollar gaining ground against major currency counterparts. The EUR/USD currency pair, which had been range-bound prior to the announcement, fell sharply following the data release.
– EUR/USD dropped from around 1.0880 toward 1.0830 in the minutes after the PMI announcement
– The pair reached intraday support levels near the 1.0825 area before stabilizing briefly
– USD strength was broad-based, impacting pairs such as GBP/USD and USD/JPY
The upward momentum in the US dollar is being driven by a reassessment of monetary policy expectations. Traders and investors, who had begun to price in potential Fed rate cuts later in 2024, are now pulling back on those expectations in light of stronger economic data. This recalibration is driving Treasury yields higher, lending further support to the greenback.
Investor Outlook: Federal Reserve Policy Track Could Shift
The stronger-than-expected PMI data increases the likelihood that the Federal Reserve will maintain its “higher-for-longer” interest rate stance. Though inflation has been slowly moving toward the central bank’s 2 percent target, the strength in growth indicators provides justification for restraining monetary easing.
Key considerations for the Fed include:
– Continued economic resilience, particularly in services and labor markets
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Read more on EUR/USD trading.