- Manufacturing activity in the eurozone fell at the fastest pace this year in September.
- Eurozone inflation fell below 2% in September, weighing on the euro.
- Market participants estimate an 85 percent chance that the ECB will cut rates in October.
The EUR/USD outlook shows the Euro in free fall after a string of poor business activity and inflation from the Eurozone. At the same time, the dollar was on top after Powell’s speech dampened the prospect of another big rate cut in November.
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Eurozone data on Tuesday revealed that manufacturing activity fell at the fastest pace this year in September, pointing to a drop in demand. Eurozone manufacturing PMI fell to 45.0, well below the 50 mark that separates expansion from contraction. Weaker economic activity pressures the European Central Bank to reduce borrowing costs.
A separate report showed inflation in the bloc fell below 2% in September, weighing on the euro. CPI fell from 2.2% in August to 1.8%, below forecasts for a 1.9% increase. Furthermore, services inflation cooled slightly from 4.1% to 4.0%.
Lower inflation gave policymakers confidence to cut borrowing costs in June and September. Moreover, market participants estimate an 85% chance that the ECB will cut rates in October.
On the other hand, the Fed implemented its first rate cut in September. A 50-bps cut increased bets for another such move in November. However, on Monday Fed Chairman Powell dismissed these expectations. He said that the central bank will probably implement reductions by a quarter of a point in the coming period. As a result, the odds of a 50 bps cut in November fell from 53.3% to 35.4%.
EUR/USD key events today
- ISM Manufacturing PMI
- JOLTS Job Opens
EUR/USD Technical Outlook: Bears take over after RSI divergence
On the technical side, the EUR/USD price has broken out of its bullish channel, with the bears in the lead. Moreover, the price is on the verge of making a new low below the support level at 1.1100. Price is trading well below the SMA with the RSI in the oversold region.
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Initially, the RSI made a bearish divergence when EUR/USD paused at the 1.1200 resistance. The divergence was a clear signal that the bulls were exhausted, and it took place when the price broke below the channel support. Given the solid bearish bias, the price is likely to reach the 1.1050 support level soon.
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