- Dollar strengthens after strong US PMI data and hawkish Fed remarks
- The probability of a back-to-back Fed hike has risen to 70%.
- EZ PMIs fail to lift the euro as hawkish ECB was already priced in.
- EURUSD falls near 1.1350; Trump–Xi meeting the next focal point.
The US dollar flexed its muscles on Wednesday, accelerating its advance against its major peers, as upbeat S&P Global flash PMIs and hawkish remarks by Fed Governor Barr prompted investors to increase their Fed rate hike bets.
According to preliminary S&P Global data, business activity in the world’s largest economy accelerated for a fourth consecutive month in September, at the fastest pace since July 2021. The composite index rose to 58.4, aided by improvements in both the manufacturing and services sectors.
Although oil prices have pulled back notably after the first half of the month, the data revealed that price pressures intensified, with the rate of inflation reaching its highest since October 2022.
As for Fed Governor Barr, he said that risks to achieving the inflation goal of 2% have increased, requiring the Fed to “recalibrate monetary policy.”
The data and Barr’s comments prompted market participants to take the probability of a back-to-back rate hike in October to 70%, while factoring in another one by January. Excluding last week’s 25bps rate increase, a total of 92bps worth of additional rate hikes are anticipated by the end of 2027.
Eurozone’s flash PMI numbers were released ahead of the US ones, and they were also better than expected. That said, they failed to add fuel to the euro’s engines, perhaps as a hawkish path was already baked into the cake for the ECB after its latest gathering, especially following post-meeting reports that ECB policymakers are leaning towards more tightening. According to Eurozone money markets, investors are anticipating 100bps worth of hikes by the end of next year.
Today, traders of the US dollar will keep an eye on the meeting between US President Trump and Chinese President Xi Jinping. Trade, tariffs, rare-earth exports and AI are likely among the issues that will be discussed. Anything suggesting more upside risks to inflation is likely to further bolster Fed hike expectations, thereby allowing the greenback to continue marching north.
From a technical standpoint, EURUSD has been in a downslide since August 21, with yesterday’s acceleration taking the pair closer to the 1.1350 zone that acted as a floor between June 24 and July 28.
If the bears are willing to stay in the driver’s seat and push the action below that zone, extensions towards the low of May 29, 2025 could be possible. That zone also offered strong resistance back in August and September 2024. For the outlook to start looking brighter, a strong recovery above 1.1585 may be needed. Such a recovery would also take the price above all three of the plotted moving averages.
