Are the increases on EUR/USD just a correction?

Services in Europe are doing well. The situation with industry is worse. At least this is what the preliminary PMI indicators published yesterday show. The same data for the US economy showed a decline in both of these areas, further evidence that the American economy is slowing down, even though so far it has been surprisingly resistant to interest rate increases.

Positive readings from Germany

The EUR/USD rate has risen to 1,07, where there is significant technical resistance. Wall Street indices had another good session this week and are making up for the losses incurred in the second and third weeks of April. The technology sector led the gains ahead of this week's key earnings reports.

The purchasing managers' index for the euro area services sector rose surprisingly strongly to 52,9 in April. The indicators for Germany (53,3 points), France (50,5 points) and Great Britain (54,9 points) also surprised positively.

The result for the entire euro zone is above the threshold barrier (50 points) for the third month in a row, which indicates the development of the sector. In turn, the production index (45,6 points) once again disappointed expectations, denying a strong rebound.

First preliminary estimates CBA for the first quarter will be published next Thursday. The improvement in PMI indices for services raises hopes that this trend will continue in the coming months. On the other hand, optimism is to some extent dampened by the economic downturn in industry. The light at the end of the tunnel is the improvement in expectations regarding the condition of the sector in the coming months.

The Eurodollar rate should be heading down 

The dynamic increases in the ECB's key interest rates have probably not yet been fully digested, and the cuts expected from June are unlikely to stimulate the economy until 2025 due to the time lag.

What the ECB can be pleased with is the fact that the selling prices subcomponent did not continue its upward trend. In both the service and manufacturing sectors, this value did not change much in April. We can draw conclusions that the underlying upward pressure on prices has intensified.

The euro gained after the PMI data yesterday morning. The dollar then fell in the afternoon following the same reading for the US economy. EUR / USD exchange rate reached the level of 1,0710 but this morning it is falling slightly.

Source: Trading View, OANDA TMS

In the medium term, the quotations of the main currency pair are still in a fairly wide descending channel, and this week's increases look only as an upward correction of the previous, dynamic declines. Increasing divergence in attitudes towards the monetary policy of the Fed and the ECB should continue to drive the EUR/USD rate lower, at least to the level of 1,0450 - the minimums from early October 2023.

Source: OANDA TMS Brokers