EUR/JPY: Pullback emerges following horrible EZ PMI data

• Eurozone August Services PMI fell into contraction territory; dropping from 50.9 to 48.3
• Treasuries extend gains after global PMIs disappoint; double digit declines across global 10-year bonds
• Yen rallies to a 1-week high against the dollar

EUR/JPY (a daily char of which is show) as of Wednesday (8/23/2023) displays a noticeable pullback after the euro area’s service sector contraction worsened. The 20-nation bloc saw the service sector unexpectedly fell into contraction territory. This round of data does not support another round of ECB tightening.

If bearishness resumes and prices fall below the 156.75 level, momentum selling could target the 154.75 region.  If the pullback is short-lived, the 158.50 zone will provide key resistance.

The eurozone is still battling elevated inflation and China’s weakness isn’t helping.  Considering how abysmal the flash PMIs were, it is surprising that inflation hasn’t significantly dropped.  After today’s poor eurozone services PMI reading, some traders are expecting the ECB might be ready to pause their tightening cycle in September.  Core inflation is still elevated, stuck at 5.5% in July, but that should drop over the next couple of reports.

ECB Rate Hike Expectations:

As ECB rate hike odds disappear, the euro looks like it could become a punching bag against the dollar.  The dollar gave back some gains after the US posted softer-than-expected PMI readings across the board.  The US service sector is barely hanging onto expansion territory and the employment component fell to 50.2, which was the lowest level since October 2022.

Jackson Hole

Fed Chair Powell will try to outline the last part of their inflation fighting game plan.  The economy is weakening a little faster and that should help inflation pressures recede even further. Powell will try to balance the risks of brining inflation to target, while trying to deliver a soft landing.  He will likely try to push back rate cut bets deep into next year.

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