The morning was marked by a divergence between strong European data and a weak reaction in the currencies: the euro and the pound continued to decline against the dollar in tandem, despite the fact that the morning eurozone data came in noticeably better than expected, while the UK data was noticeably weaker. The market is clearly focusing less on the day's statistics themselves and more on the increasingly hawkish rhetoric from the Fed, which is currently determining the overall direction.
I will start with the eurozone. The preliminary composite PMI for September jumped to 53.1 from 52.0 in August, reaching a three-and-a-half-year high and significantly exceeding market expectations. The services sector accelerated to a ten-month high, while manufacturing, largely due to strong performance in Germany, recorded its fastest growth in 55 months, or almost five years. Such resilience in growth could prompt the ECB to consider another rate hike before the end of the year, effectively bringing the October meeting back into the range of possible scenarios for the central bank. Nevertheless, even these strong figures failed to provide the euro with the expected support, and the pair continued to decline against the dollar. I believe the issue is not the quality of the European data itself, but rather that the market is currently reacting much more strongly to growing expectations of further Fed rate hikes than to positive eurozone statistics. In this environment, even a three-year high in the PMI is insufficient to offset the pressure from the more resolute rhetoric of the US central bank.
The picture in the UK was exactly the opposite. The preliminary composite PMI fell to 51.7 in September from 52.5 in August, declining to a three-month low, while the manufacturing index fell to a six-month low. The main source of weakness was the services sector, where export orders declined, while employment continued to fall for the second consecutive year. This is already a sign of a persistent rather than temporary problem in the largest sector of the UK economy. In my view, the weakness in services was the main source of pressure on the pound, as the market traditionally places particular weight on this sector when assessing the overall state of the UK economy. Falling export orders, together with the continued decline in employment, weakens the case for a more hawkish interest-rate stance from the Bank of England, and without the prospect of tighter policy, GBP/USD loses one of its few remaining drivers for a recovery.
In the second half of the day, attention will turn to the US side as well: the market is awaiting the preliminary September US PMIs — manufacturing, services, and composite. The US economy is currently performing well according to these indicators, and strong figures could give the dollar an additional reason to strengthen, especially against the backdrop of the hawkish consensus that has formed within the Fed in recent days. The picture will be complemented by a speech from Federal Reserve Governor Michael Barr, whose rhetoric in recent weeks has consistently favored further tightening. I would not be surprised if today's comments prove consistent with the views of traders positioning for a stronger dollar. For the euro and pound, such a scenario is particularly unfavorable following this morning's surprise: the eurozone PMI reached a three-year high but still failed to help the single currency strengthen against the dollar, as the market is clearly prioritizing the US outlook. If the evening US data confirms the resilience of the economy and Barr adopts a more hawkish tone, EUR/USD and GBP/USD risk continuing to decline in tandem, as the pound has little additional support of its own today — its domestic data has already been priced in, and the pair now depends entirely on external factors. I believe that the evening data, rather than the morning European figures, will determine the direction of both pairs through the end of the session.
MomentumFor the euro, the key level on the upside is 1.1433. A breakout above it could take the pair toward 1.1454 and then 1.1478. This scenario is realistic only if the evening US data is clearly weak. Without such a surprise, even the eurozone's PMI record this morning is unlikely to outweigh the Fed's hawkish stance. A downside breakout below 1.1410 looks much more likely, with targets at 1.1392 and 1.1376, as the evening data and Barr's speech are likely to continue supporting the dollar.
For the pound, the key level on the upside is 1.3307, above which the pair could move toward 1.3341 and then 1.3368. However, following today's weak PMI and in the absence of new reasons for optimism, such a move appears unlikely. A downside break below 1.3275, with targets at 1.3243 and 1.3220, fits the overall picture much better, especially given that there will be no more UK economic data today.
Mean ReversionFor the euro, I am watching the upper boundary at 1.1429. The logic is simple: the pair attempts to hold above this level, but there are not enough buyers to sustain the move, and the price slips back down — a sell signal. Even taking the strong morning PMI into account, this scenario remains appropriate while the market awaits the evening US data. The lower reference level at 1.1400 works according to the opposite logic, but buying here should be approached with caution: the strong eurozone PMI alone will not remove the pressure from the Fed, so it is reasonable to keep the target for such a trade modest.
For the pound, the upper boundary is 1.3308. The same reversal setup applies here, and given today's disappointing PMI, a false breakout to the upside followed by a quick return inside the range looks like a plausible scenario. The lower reference level at 1.3260 implies buying on a rebound after a false downside break, but this level should be traded with caution. Weakness in the services sector itself does not support a sustained reversal, so any rebound here should be viewed as purely technical rather than the beginning of a new move.