Euro to Dollar Exchange Rate Short-term Outlook Firms On Eurozone PMI Surprise

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Euro exchange rates were bolstered at the start of the new week after Eurozone PMI data showed an uptick in activity in December.

The Euro to Dollar exchange rate (EUR/USD) firmed above the key 1.0450 horizontal support line after S&P Global's Services PMI rose to 41.4 in December from 49.5 in November. The consensus expected another 49.5 reading; a PMI above 50 represents growth for the sector.

The headline points to an unexpected consumer resilience, which can underpin the Eurozone economy while providing a much-needed positive surprise for the euro.

However, EUR/USD upside will be limited as the remainder of the PMI report pointed to ongoing challenges facing Europe.

The Manufacturing PMI stayed at 45.2, which is deep in contractionary territory, whereas the consensus looked for improvement (45.3).

The Composite PMI, which balances these data to arrive at a more representative gauge of the wider economy, read at 49.5, which is above November's 48.5.

S&P Global says output was scaled back amid sustained reductions in new orders and the pace of job cuts was the fastest in four years as companies responded to a drop in workloads by lowering their staffing levels.

This is a relevant finding for the European Central Bank (ECB), which thinks falling employment will lower wages, which will, in turn, lower inflationary pressures.

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The ECB cut interest rates by 25 basis points last week, citing economic weakness and growing confidence that inflation was back under control.

These PMI data will, on balance, reinforce the message and keep the door ajar to further cuts at the ECB in 2025.

"These data will strengthen ECB policymakers’ view that further interest rate cuts are needed. There doesn’t yet seem to be much appetite for 50bp rate cuts, but that could change if the data remain very weak. And even if the Bank continues to move in 25bp steps, we think it will lower rates a bit further than investors currently expect," says Jack Allen-Reynolds, Deputy Chief Euro-zone Economist.

Should the ECB 'outcut' the Federal Reserve and Bank of England, then the Euro will likely remain under pressure against the Dollar and Pound.

However, the ECB confirmed it is not on autopilot and will still respond to the incoming data. Caution is warranted as the PMI report said inflation rates of both input costs and output prices quickened at the end of the year, with charges rising at a pace that remained above the series average.

The Eurozone's economic malaise remains centred on falls in its two largest economies, Germany and France. Both remained in contraction during December, with rates of decline easing only slightly from the previous month.

In contrast, the rest of the Eurozone posted a solid increase in output at the year's end, with the expansion rate reaching a six-month high.

Euro-Dollar looks set to be supported above 1.0450 this week, with further gains possible, potentially taking in 1.0580. Much will also depend on Wednesday's Federal Reserve policy decision, where an interest rate cut is anticipated.

The cut is 'in the price' of the Dollar, but markets will be interested in hearing how the Fed communicates that it will forgo another cut in January.

Messaging will be important, but we don't think there will be enough said or done to break the 1.0450-1.06 range that is being cemented in Euro-Dollar's shorter-term charts.