Dollar Recovers from Lows as Euro Faced with Weak PMI Data

The U.S. dollar strengthened on Monday, recovering from a one-year low reached the previous week, while underwhelming economic data exerted pressure on the euro.

As of 04:15 ET (08:15 GMT), the Dollar Index, which measures the dollar against a group of six other currencies, was up 0.5% at 100.925, marking a move away from a 12-month low.

Dollar Focused on Upcoming Economic Data

The dollar has experienced some recovery following a significant interest rate cut by the Federal Reserve last week, with many traders now dismissing the likelihood of a U.S. recession. Analysts at ING noted, "Investors seem to have embraced the soft landing narrative presented by Chair Jerome Powell last week. Instead of the 50 basis point rate cut unsettling equity markets, key benchmarks have actually continued to rise."

Nonetheless, futures markets are currently anticipating 75 basis points of rate cuts by the end of this year, with expectations for nearly 200 basis points in cuts by December 2025.

A crucial economic report is scheduled for release on Friday, presenting the Fed’s preferred measure of inflation, known as core personal consumption expenditures. Analysts project a 0.2% month-on-month increase, leading to an annual rate of 2.7%, while the headline index is expected to slow to 2.3%. ING warned that a 0.1% core PCE reading could potentially lead to further declines in both U.S. rates and the dollar.

Euro Declines Due to PMI Data

In Europe, the euro fell 0.5% against the dollar, trading at 1.1111, following reports indicating that German business activity contracted in September at the steepest rate in seven months, signaling a potential recession in Europe’s largest economy. The HCOB German flash composite Purchasing Managers’ Index dropped to 47.2 from 48.4 in August, falling short of the forecast of 48.2.

Earlier this month, the European Central Bank reduced rates for the second time this year, and continued signs of economic weakness may increase the odds of another cut in October. ING stated, "The current environment is not favorable for the euro, nor for pushing EUR/USD above significant resistance at 1.12. A consolidation in the 1.11-1.12 range appears likely, with potential downside risks early this week."

The British pound also weakened against the dollar, falling 0.4% to 1.3264, after recently reaching its highest level since March 2022. The Bank of England maintained its key interest rate at 5% last Thursday after a 25 basis point reduction in August. ING commented that long positions in sterling appear quite extreme, although recent data showed a notable decrease in speculative long positions.

Yuan Slides Slightly After Rate Cut

The yuan experienced a slight decrease, with USD/CNY moving 0.1% higher to 7.0595 following a rate cut by the People’s Bank of China aimed at easing monetary conditions and bolstering economic growth. USD/JPY edged down 0.1% to 143.72, with overall trading volumes muted due to a holiday in Japan; however, the yen remains near its strongest levels of the year. The Bank of Japan kept interest rates unchanged last week, indicating expectations for gradual increases in inflation and economic growth.