Commerzbank’s Michael Pfister highlights persistent headwinds for the Euro after dovish comments from European Central Bank (ECB) President Christine Lagarde reduced market expectations to roughly 33 basis points of further tightening this year. He argues that today’s Eurozone PMIs could improve recovery prospects, and that a positive surprise in services PMI would be key for Euro gains, potentially refocusing EUR/USD on 1.15.

Euro needs strong services data

“There is currently nothing but bad news for the euro. ECB President Christine Lagarde sounded rather dovish yesterday when she spoke of inflation returning to target in the medium term.”

“These statements further dampened expectations of interest rate hikes, with the market pricing in only roughly 33 basis points of further tightening by the end of the year after the comments. While our economists are likely to feel vindicated in their expectation of just one further hike, this is, of course, not helpful for the euro.”

“Today’s Purchasing Managers’ Indices from the euro area could bring about a turnaround. Given the cautious glimmers of hope regarding the Strait of Hormuz, the PMIs are likely to rise significantly, thereby improving the prospects for recovery in the real economy.”

“Market participants should also bear in mind that the euro’s reaction to the PMIs depends on which one is considered. The manufacturing PMI is practically irrelevant for the euro, even in the event of a positive surprise.”

“In that case, the euro could well appreciate. Bullish market participants should therefore be banking on a positive surprise in today’s services PMI. EUR/USD may then even set its sights on the 1.15 level again.”

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