Euro Struggles at $1.12 After Fed Rate Hike Expectations

eurusd

XM Investment Research Desk: The euro underperformed today and fell below the key $1.12 level as disappointing Eurozone PMI data and a broadly stronger greenback weighed on the single currency.

The euro dropped to as low as $1.1186 after having reached an early European session high of $1.1238. The flash version of Eurozone manufacturing and services PMI missed forecasts for May and raised concerns about the health of the region’s economy. The composite PMI registered at a 16-month low of 52.9 versus a prior 53.0. It fell short of estimates for a 53.2 reading.

A stronger German manufacturing PMI reading at a 5-month high and a services PMI at a 3-month high were not able to stop the euro’s decline. Meanwhile, other data on Eurozone consumer confidence, which improved in May to -7.0 points from -9.3 in April did not help either. Today’s figure was better than the -9.0 that was expected and was the highest level since January.

The main focus of the markets today was on Fed speakers, whose comments kept the US dollar firm against the euro and the pound and especially against the commodity-linked currencies. The greenback was weaker though against the yen, as it lost the 110 yen handle today and fell to as low as 109.31 yen.

St. Louis Fed President James Bullard spoke today and warned that keeping US interest rates too low for too long could be risky. San Francisco Fed John Williams joined Boston Fed’s Eric Rosengren’s call for 2-3 rate hikes in 2016. Rosengren said in an FT article published on Sunday that the US was on the verge of passing the test for a June rate rise.

There will be another Fed speaker later today as Philadelphia Fed’s President Patrick Harker is scheduled to speak on the economic outlook at the Philadelphia Fed’s event this evening.

As focus was more on Fed speakers today, not much attention was paid to the US manufacturing Markit PMI data. The index for May was expected to have gained modestly to 51.0 from 50.8 in April but was down to 50.5.

Gold slid to a fresh 3-week low of $1,243 due to the stronger dollar and Fed rate hike expectations, while US oil futures fell to $47.39 a barrel. The slide in crude prices weighed on the Canadian dollar. As a result, USDCAD rose to a fresh 7-week high of $1.3173.

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