EUR/USD eyes eurozone and German services PMIs

• German and Eurozone PMIs expected to ease on Wednesday
• Fed releases minutes of June meeting on Wednesday
• US yield curve hits deepest inversion since 1981

EUR/USD is drifting downward on Tuesday. In the North American session, the euro is trading at 1.0898, down 0.15%. The US markets are closed for the July Fourth holiday, and we can expect limited movement from EUR/USD for the remainder of the day.

Services PMIs expected to show weaker expansion

After disappointing German and eurozone Manufacturing PMIs on Monday, it’s the turn of Services PMIs on Wednesday.  Although the Service PMIs are expected to weaken, both are expected to point to expansion, with readings above the 50.0 level. The eurozone PMI is expected to dip to 52.4, down from 55.1, while the German PMI is projected to slow from 57.2 to 54.1. The euro didn’t show much of a reaction to the Manufacturing PMIs, as the prolonged decline in manufacturing was not a surprise. I don’t expect the Service PMIs to weigh on the euro unless the releases are below expectations.

The markets will be keeping a close on the Fed minutes from the June meeting, which will be released on Wednesday. The Fed delivered a 0.25% hike at the June meeting and the markets are widely expecting a repeat in July, which would bring the cash rate to a range of 5.25%-5.50%.

The markets have fallen into line with the Fed’s aggressive stance, and investors are no longer expecting a rate hike or two before the end of the year. Fed Chair Powell has hinted at one more rate hike after July before the end of the year and there are growing concerns that if the Fed continues to increase rates the economy will tip into a recession.

The spread between 2-year and 10-year Treasury note yields hit its widest level since 1981 on Monday, raising fears of a recession. A yield curve inversion is considered a reliable indication of a recession and the current inversion has been in place since July, stoking concern about the direction of the US economy.

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EUR/USD Technical

• EUR/USD is testing support at 1.0908. This is followed by support at 1.0838
• 1.0980 and 1.1050 are the next resistance lines

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