EURUSD:
The euro starts the day near 1.1375 after weak euro area business activity data. The preliminary composite PMI rose to 49.5 in June but remained below the neutral threshold for a third consecutive month, while the services sector continued to contract. For the single currency, this matters more than a one-off improvement in the headline figure: weak new orders and cautious corporate activity point to continued vulnerability in domestic demand.
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The ECB raised key interest rates on June 11 in response to inflation risks linked to energy markets. However, weak services activity and a more moderate pace of cost growth limit the scope for further tightening, as the central bank also has to consider the risk of slower economic growth. As a result, the latest decision alone does not create a lasting advantage for the euro over the US dollar.
The US dollar, by contrast, continues to benefit from shifting expectations for Federal Reserve policy. After the Federal Reserve kept its target range at 3.50%–3.75%, markets became more inclined to price in another rate increase later this year, while weaker risk sentiment supported demand for the dollar. As long as the divergence in expectations between the Federal Reserve and the ECB remains in focus, EUR/USD may remain biased to the downside.
Trading idea: SELL 1.1375, SL 1.1405, TP 1.1285
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