Contrasting US-EU PMIs and EURUSD

The latest PMI data from the EU and US show diverging economic growth trends, with the US appearing positioned to outperform. But can this imply lower levels for the EURUSD going forward?

Mixed Picture Not Reassuring

The picture of the European economy remains mixed. Recent data points illustrate the uncertain situation, such as Germany reporting an increased trade surplus driven by faster-falling imports relative to exports as trade declined. Even surprisingly strong factory orders of 8.9% in December were attributed to a few large contracts unlikely to be repeated soon. This points to data improving only in comparison to prior worse performance.

This reflects the Eurozone PMI results from earlier in the week, which rose slightly but remained below 50. Notably, the contraction has been ongoing for nearly two years. Inflation impacted the services sector, where demand slowed.

In contrast, US services activity expanded further in January, and non-manufacturing PMI jumped to 53.4 compared to 50.5 in December. This was consistent with the robust job growth reported last week, signalling not only ongoing economic momentum but also rising price pressures.

A Better Look Under The Hood

While economic expansion often sees liquidity flow into the stock markets, higher inflation complicates the outlook for the dollar as the Fed is reluctant to lower interest rates. After the latest policy meeting, Fed Chair Jerome Powell dismissed expectations of a March rate cut and reiterated a more hawkish stance.

Meanwhile, the US may not be entirely free of recession risks in the near term. The Federal Reserve Bank of New York's Recession indicator shows a greater than 60% chance of economic contraction in 2024. In addition, the S&P Global Services PMI was recently revised downwards, and the Composite PMI slid, with the former indicating inflationary pressures have begun to moderate from the highs seen in 2020. Compared to the persistently high inflation still experienced in the Eurozone, the EURUSD currency pair retains the potential for stability, especially if incoming data points to a slower rise in inflation in the months ahead.

EURUSD Bounces By Neckline

The EURUSD currency pair recently tested the 1.0725 level, where it found support to form a double-bottom. This could be the neckline for a head and shoulders formation, pending completion of the right shoulder. Maintaining firmness above the support could drive prices towards 1.1017 unless bullish momentum stalls at 1.0843 or 1.09. Conversely, a break below the critical swing could pave the way for further weakness towards 1.0640, exposing 1.05.

Source: SpreadEx / EURUSD

Key Takeaways

The US services sector expanded in January, indicating ongoing momentum, in contrast to the Eurozone services PMI, which remained below 50, pointing to ongoing contraction for nearly two years. While the data shows that the US economy continues to expand, inflation is seen as moderating. And despite the Fed signalling a hawkish stance, recession risks remain for the US economy in the medium term, implying EURUSD may find stability around current levels, especially if US inflation begins to moderate in the coming months.