FOREX Fundamental analysis for EUR/USD on January 25, 2023
Business activity indexes, released the day before, showed that Eurozone composite PMI had risen above the key 50-point level for the first time since June, which added a contrast to the economic assessment of the Euro bloc and the United States, and in favor of the Old World. If we also include monetary policy divergence, with the ECB continuing to raise rates and the Fed slowing down its monetary tightening, EUR/USD has no reason to fall just yet.
The manufacturing PMI rose from 47.8 to 48.8 ppts in January while services rose from 49.8 to 50.7 ppts. According to the data the Eurozone economy is stably recovering and might well avoid a prolonged recession. At the same time, the dollar, following the Fed's decision to slow the pace of monetary easing, has lost its main support factor. The regulator is 98% likely to raise the rate by only 25 basis points at the February meeting.
Nevertheless investors reacted to the positive Eurozone PMI statistics in a peculiar, though expected, way. When everybody is buying, the big players are fixing their profits on the facts, and this was reflected in the EUR/USD dynamics. However the decline was short-lived, and at the American session, after the release of the weak U.S. business activity indexes, traders started to buy Euro again, realizing that the time for a large EUR/USD correction hasn't come yet.
The United States is not having a good start to 2023, which gives the Fed an excuse to complete its monetary tightening cycle and even help the U.S. economy with stimulus measures.
At the same time, there are more and more voices on the ECB's board in favor of a 50 basis point rate hike in both February and March. But comparing objectively the monetary policy of the Fed and the ECB, it should be recognized that with a total of 100 basis points of restriction the rate in the Eurozone would rise to 3.25%, while in the USA the Fed would bring it down to 5%.
Hence, there are still risks to the single currency. In addition, the recovery of the Chinese economy is a double-edged sword. Of course, the export-oriented economy of the Eurozone will receive additional preferences, but rising demand for energy will certainly raise its cost, which may bring back the risks of an energy crisis in the Old World, with all the ensuing consequences.
On Wednesday the EUR/USD is trading in a narrow price range around the highs of 9 months and the important 1.0900 level. The single currency is supported by the rhetoric of the European Central Bank, which talks about the need to actively increase its key interest rate.
But euro buyers prefer not to notice the possible threats. The "bulls" managed to keep above the pivot level of 1.083, which indicates the seriousness of their intentions. EUR/USD keeps moving towards the previously set targets at 1.095 and 1.104.