EUR/USD Consolidates as Fed’s Tightening Prospects Offset Risk-On Sentiment

The EUR/USD remains in a bearish momentum, with market participants eagerly anticipating today’s release of the ISM Manufacturing PMI, which is expected to deliver a positive forecast.

“The potential for a higher-than-expected ISM Manufacturing PMI Price Index would support the notion of continued high inflation, which aligns with the Fed’s stance on maintaining higher interest rates. This could contribute to the strength of the US Dollar as investors seek safety.

The primary driver influencing this muted performance is the increasing likelihood of further policy tightening by the Federal Reserve (Fed). This has prompted a fresh rally in US Treasury bond yields, bolstering the US Dollar (USD). In addition to the Fed’s hawkish stance, expectations that the European Central Bank (ECB) may put further rate hikes on hold are acting as headwinds for the EUR/USD pair.

Despite these factors, the risk-on sentiment in the market is preventing traders from making substantial bets in favor of the safe-haven USD. This sentiment shift is providing some support to the EUR/USD pair.

The upcoming release of the US ISM Manufacturing Purchasing Managers’ Index (PMI) for September is a key event to watch. Market analysts anticipate a modest increase in the PMI to 47.7 from the previous reading of 47.6. While this figure would still indicate a contraction, the improvement suggests some positive momentum in the US manufacturing sector.

Additionally, sub-components of the ISM report, such as the Employment Index and New Orders, are expected to show improvements. The Prices Paid Index, which gauges the price change US manufacturers pay for inputs, is also anticipated to rise, indicating persistent inflationary pressures.

The potential for a higher-than-expected ISM Manufacturing PMI Price Index would support the notion of continued high inflation, which aligns with the Fed’s stance on maintaining higher interest rates. This could contribute to the strength of the US Dollar as investors seek safety.

Overall, the EUR/USD pair’s outlook remains influenced by a delicate balance of factors, including central bank policies, economic data, and market sentiment. While the pair may experience some consolidation, the risk of further weakness in the EUR/USD remains, particularly if the US economic data continues to support a strong USD.