The Eurozone is still heavily affected by persistent inflation.

The Euro has once again weakened to its lowest level in 2 months after data revealed that both Germany's and the Eurozone's business activities were lower than expected in August. Germany's contraction is the most severe in over 3 years, causing investors to closely watch the upcoming remarks of both European Central Bank (ECB) President, Christine Lagarde, and Federal Reserve Chair, Jerome Powell, on Friday, to gauge their views on future interest rate hikes and the overall economic outlook.

The services sector PMI dropped to 48.3 in August from 50.9 the previous month, marking the sharpest contraction since the end of 2023. This was driven by a notable decline in employment as well. On the manufacturing front, the PMI increased to 43.7 from 42.7 the prior month, surpassing the market expectation of 42.6. However, the trend remains in the downturn territory, with new orders leading to a reduction in production, and slight job cuts, while factories continued to trim inventories.

Niels Christensen, Chief Analyst at Nordea, commented, "The clearly declining services sector activity and the softer euro environment reflect a likely scenario where, if inflation data remains sluggish, there is a high chance that the ECB will pause its aggressive interest rate hikes in September. On the economic front, the United States might experience a minor slowdown but remains more resilient compared to Europe, potentially giving the US dollar an advantage at this point.

The strong economic data from the United States that indicates ongoing strength has helped alleviate concerns about an imminent economic downturn. However, the persistently high inflation rate, which remains above the 2% target, suggests a higher possibility that the Federal Reserve (FED) might maintain higher interest rates for an extended period. Similarly, in the Eurozone, there's an anticipation that the European Central Bank (ECB) will also halt its interest rate hikes.

The increasing worries have led to a rising sell for government bonds, resulting in higher yields, the 1-year and 10-year government bond yields in the Eurozone offer returns of 3.57% and 3.44% respectively. In comparison, the United States offers yields of 5.39% and 4.19%, showing a significant difference in returns. This yield differential could be another factor contributing to the recent weakening of the Euro.

Techical analysis data (5H)

Resistance: 0.9219, 0.9228, 0.9241

Support: 0.9198, 0.9184, 0.9176

Source: Investing.com