Euro steady, eyes PMIs

The euro is showing limited movement on Tuesday. In the North American session, EUR/USD is trading at 1.0866, down 0.15%.

Eurozone, German  PMIs expected to remain in contraction

The eurozone economy is sputtering and the road to recovery is likely to be a long one. Manufacturing  and services PMIs are useful gauges of economic activity and the news has been grim. Both the eurozone and Germany, the largest economy in the bloc, are grappling with prolonged contraction in the manufacturing and services sectors, with readings below 50. This is not expected to improve anytime soon, and the December PMIs, which will be released on Wednesday, are projected to remain in contraction territory.

ECB President Lagarde sounded hawkish at the December meeting, as she pushed back against expectations of rate cuts, saying that inflation could rebound and that there was no discussion of rate cuts at the December meeting. Lagarde was singing a different tune last week in Davos, as she acknowledged that a rate cut was likely in the summer. The markets have priced in 140 basis points of cuts this year, although ECB members have warned that the markets are getting ahead of themselves. The ECB meets on Thursday and investors will be keeping a close eye on the ECB rate statement and Lagarde’s follow-up press conference at Thursday’s meeting.

The markets were abuzz with excitement in December when Fed Chair Powell jumped on the rate-cut bandwagon. That optimism has dissipated somewhat as a March rate cut is looking less likely. A month ago, a quarter-point cut in March was priced at 75%; that has dropped to 42% currently, according to the CME’s FedWatch tool. Fed members continue to raise doubts about a March cut and are talking about two or three cuts this year, compared to the six cuts priced in by the markets. US economic data has been solid, which means that the Fed isn’t under pressure to lower rates right away.

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EUR/USD Technical

• EUR/USD pushed below two support levels and has support at 1.0842
• There is resistance at 1.0891

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