Dollar Drives Higher on Positive Services Outlook

Intermediate
  • U.S. Services are in expansionary mode
  • Market likes that even if manufacturing is in a slump
  • The ECB is likely to spend the year pondering inflation…or the lack of it
  • The EURUSD rate will slide to 1.0800 in Q1 2020

The U.S. Dollar climbed against its rivals Friday on data that showed evidence of ongoing strength in the U.S. services sector. This was able to offset a continued slowing in manufacturing to a three-year low.

The IHS Markit US Services PMI rose to 53.2 in January 2020 from 52.8 in the previous month, above market expectations of 52.9, a preliminary estimate showed.

The IHS Markit US Manufacturing PMI fell to 51.7 in January of 2020 from 52.4 in December, below market expectations of 52.5. It was the slowest increase in factory activity in three months, flash figures showed. Although output continued to rise at a moderate pace, new business growth was only marginal as both domestic and foreign client demand softened.

Manufacturing PMI

Figure 1: U.S. Services and Manufacturing PMI    Source: IHS Markit

The latest reading of the services PMI indicates the strongest pace of expansion in the service sector since last March, as employment increased the most in six months while new order growth eased.

Business optimism reached a seven-month high although input prices rose the most since last July and output charges were raised only at a modest pace.

The U.S. Dollar Index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.18% to 97.87.

This news came a day after the ECB left the key interest rate on the main refinancing operations steady at 0.0% during its January 2020 meeting, as expected. The marginal lending facility was also kept at 0.25% and the deposit facility at -0.50%.

Much had been expected from the ECB President, Christine Lagarde re a new inflation strategy. She confirmed the launch of a strategic review but failed to provide any details.

Inflation has been consistently below the central bank’s target range. This is defined under the current strategy as a consumer price index of “close to, but below, 2%” over the medium term. This shortfall has occurred despite increasingly aggressive stimulus measures under Lagarde’s predecessor, Mario Draghi.

Lagarde is therefore on a mission to make her mark and will announce the scope of the ECB’s first strategic review since 2003. There was no new startling announcement, in fact the review will be a drawn out affair lasting for most of the year and is likely to embrace a range of topics such as inflation, growth and the risks from digital money.

Therefore the U.S. Dollar looks set to tower over the Euro. There is not one single bullish aspect to the EURUSD pair.

EURUSD time technicals

Figure 2: Technical Sentiment Toward EURUSD    Source: www.investing.com, Spotlight Group

The Euro traded below $1.104 early on Friday, the weakest since December 2nd. Clearly the Euro was friendless in the ring after Lagarde took a more dovish tone during the ECB press conference on Thursday.

Also, data showed business activity in the Euro Area remained very weak in January as slight improvement in manufacturing activity was not enough to offset a slower growth in services.

On the day the EURUSD fell by 0.24% to 1.1025 and I see a slide past the 23.6% retracement line to 1.0855 on the cards as the first quarter unwinds.

EURUSD Three year chart

Figure 3: Three -Year EURUSD Chart   Source: www.investing.com , Spotlight Group

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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