Euro in holding pattern ahead of ECB decision

The euro is showing limited movement on Thursday. In the European session, EUR/USD is trading at 1.0895, up 0.10%.

Eurozone PMIs, released on Wednesday, pointed to trouble in the manufacturing and services sectors. Manufacturing has been in deep-freeze, although the January manufacturing PMI improved to 46.6, up from 44.4 and above the consensus estimate of 44.8. Manufacturing PMI hasn’t posted a reading over 50, which indicates growth, since June 2022. The upswing in the January reading may be misleading since the sharp drop in the delivery times index due to tensions in the Red Sea boosted the headline number.

The services sector, which dominates economic activity, dropped to 48.4, down from 48.8 in December and shy of the consensus estimate of 49.0. This marked a six straight contraction in services activity. German PMIs were slightly lower, at 45.4 for manufacturing and 47.6 for services.

ECB expected to hold rates

Against this background of weak economic activity, the ECB makes its first rate announcement for 2024 later today. The ECB has pushed back against rate cut expectations, despite a weak eurozone economy and the sharp drop in inflation. The central bank has kept the benchmark rate at 4.0% since September and has likely ended its rate-tightening cycle but is in no rush to start chopping rates. The markets have been much more aggressive and have priced in 140 basis points in cuts, with the first cut expected in the summer.

The ECB will very likely pause once again at today’s meeting, and investors will be keeping a close eye on the rate statement and ECB President Lagarde’s follow-up press conference. Will Lagarde push back hard against rate cut fever, as she did at the previous meeting? If not, expectations of a rate cut will rise and the euro could come under pressure as a result.

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EUR/USD Technical

• EUR/USD is testing resistance at 1.0888. Above, there is resistance at 1.0929
• There is support at 1.0843 and 1.0802

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