Euro falls on soft German manufacturing data

The euro has posted sharp losses today and has dropped below parity. In the North American session, EUR/USD is trading at 0.9989, down 0.65%.

German Manufacturing PMI remains in contraction

Germany’s manufacturing sector continues to struggle. The August Manufacturing PMI dipped to 49.1, down from 49.3 in July. The drop was not dramatic, but it marked a second straight reading of contraction, and was the lowest level since May 2020, at the start of the Covid pandemic. Manufacturing, indeed the entire German economy, has been hurt by the uncertain outlook and rising inflation. With an energy crisis this winter a constant worry in Europe, cost pressures remain high and are showing an upside risk.

Inflation in the eurozone continues to move higher. This week, Germany and the eurozone reported that inflation accelerated in August. In Germany, inflation jumped to 7.9%, up from 7.5% in July. It was a similar trend in the eurozone, with inflation rising to 9.1%, up from July’s record high of 8.9%. Unlike the Fed or the BoE, which have dramatically raised interest rates, the ECB’s benchmark rate stands at just 0.50%, which will have little effect on inflation. The ECB has fallen behind and is paying the price after dismissing rising inflation as transitory and maintaining its ultra-loose policy. The ECB’s next meeting is on September 8^th and the August inflation reports have boosted expectations for a super-size 75 basis point rate increase. Such a move would likely provide the euro with some badly-needed support.

On Friday, the US releases nonfarm payrolls, one of the most important events on the economic calendar. The August report is expected to show a strong gain of 300 thousand, after the unexpected massive gain of 528 thousand in July. We could see some significant movement from the US dollar on Friday – a strong reading would likely boost the US dollar, while a weak release would likely weigh on the greenback.

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EUR/USD Technical

• EUR/USD is testing support at 0.9985. Below, there is support at 0.9880
• There is resistance at 1.0068 and 1.0173

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