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The euro ignored a three-and-a-half year high in Eurozone activity as the dollar extended a third day of gains.
The Euro to Dollar exchange rate fell to 1.1408 on Wednesday, within a cent of its late July low, despite the strongest Eurozone business survey in three and a half years.
The composite PMI rose to 53.1 in September from 52.0, a 41-month high, against a consensus of 51.7.
"The Eurozone September PMI was stronger than anticipated and backs additional ECB hikes," says Elias Haddad, Global Head of Markets Strategy at Brown Brothers Harriman (BBH).
"EUR/USD is down on broad USD strength," he explains.
The Dollar Is Taking Everything
The reason for the suriprising EUR/USD underperformance is the dollar, which is taking everything on the day. The dollar index - a measure of broader USD performance - edged up to around 100.7 in Asian trading, a third consecutive session of gains.
The 2-year US Treasury yield reached a new high at 4.78%, with Societe Generale citing hawkish Federal Reserve commentary.
Markets price in around three further 25 basis point Fed hikes by mid-2027, including a half chance of a move at the October meeting.
Short-term, keep an eye on Fed Governor Michael Barr and Chicago Fed President Austan Goolsbee, due to speak at 3:05pm and 5pm London time. With Fed expectations so bullish, any 'dovish' comments could trigger a pullback.
Gains for the dollar come despite Brent crude now holding just under $100 a barrel after five days of declines, with Saudi Arabia restoring flows on its East-West pipeline and US envoys Steve Witkoff and Jared Kushner meeting Iranian officials at the United Nations.
Falling energy costs improve the Eurozone's import bill, and yet the euro has taken no benefit from it. This is a USD exceptionalism story.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Despite strong domestic data on the day, there are some concerns about the outlook: the 10-year French-German government bond spread has widened to 104 basis points, the highest since July 2012.
That speaks of internal divergence and stability concerns.
CBA says political uncertainty in Germany and France is likely to keep EUR/USD under pressure.
France's composite PMI rose to 51.2 from 48.5, its first expansionary reading this year, though businesses continued to cut headcount.
"We expect France to remain the Eurozone laggard, growing by just 0.4% this year while the Eurozone economy expands by 1.1%," says Andrew Wishart, economist at Berenberg.
Germany's composite reached its highest level in almost a year, with rising orders encouraging firms to hire, though Wishart warns the country's reliance on gas for power generation will sap momentum as prices stay elevated.
Where EUR/USD Support Sits
The swaps curve more than fully prices 75 basis points of ECB tightening to 3.25% over twelve months, which would leave the policy rate above the central bank's 1.75% to 3.00% neutral estimate.
BBH says that limits euro downside, and identifies support at 1.1400, then 1.1353, the July 28 low, and 1.1325, the June 24 low.
Sterling is in the same position against the dollar after its own PMI undershoot.
US September PMI data released this afternoon will test whether the growth advantage driving the dollar remains intact, with BBH expecting the readings to show the US maintaining its edge over the Eurozone, UK and Japan.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
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