The Euro continues to languish below the 1.08 mark against the US dollar as traders position themselves to take advantage of the higher yield on the greenback which is going to last for a considerable time as interest rates remain elevated for longer and are even likely to go higher.
Several influential figures from the Federal Reserve hinted at the need for further tightening of monetary policy such as Minneapolis Fed President Neel Kashkari who suggested that U.S. rates might need to exceed 6% for inflation to reach the Fed’s 2% target which means the US central bank still has some work to do.
St. Louis Fed President James Bullard has also weighed into the argument and stated that the Federal Reserve may have to raise rates by an additional half-point before the end of the year to reign in inflation and help cool the economy.
In contrast to the USA, the euro zone witnessed a slight slowdown in business growth with the services industry showed a slight decrease in performance, while the manufacturing sector experienced a more significant downturn.
The HCOB’s flash Composite Purchasing Managers’ Index (PMI) for the euro zone fell from 54.1 in April to 53.3 in May. Although new business growth slowed down, services firms continued to hire at a strong pace, albeit slightly lower than the previous month.
Demand for manufactured goods decreased, leading to the lowest factory PMI since May 2020. The output index also dropped to a six-month low.
Despite these challenges, factories were able to reduce their prices for the first time since September 2020 due to improved supply chains and lower energy costs.
This development may be seen as positive by policymakers at the European Central Bank (ECB), who have struggled to bring inflation back to their 2.0% target.
Looking further ahead today, the main drivers of the EUR/USD currency pair will be the release of IFO business climate index from Germany as well as a monetary speech from European Central Bank president Christine Lagarde.
The highlight of the day will be the release of the minutes from the US Federal Reserve where investors will be focused on any hints of a rate hike that many are expecting next month.