The US ISM data will maintain expectations of a slowdown in the US economy and will further dampen expectations of a Federal Reserve interest rate increase which will also unsettle the dollar as fundamental confidence in the US economy weakens. The Euro has secured some degree of respite from persistent selling pressure, but fears could return very quickly. In this context, the Euro still faces major barriers to sustained gains. Confidence in the global economy is also likely to be weaker which will discourage capital flows out of the US and there is still some scope for some defensive dollar demand. Overall, the Euro is still likely to face selling pressure above 1.2650 even with further potential support below 1.25 given the dollar vulnerability.
The Euro found support below 1.25 against the dollar in early Europe on Tuesday and then strengthened steadily during the day. Equity markets looked to rally after recent losses which helped improve risk appetite and underpin the Euro. There was some stabilisation in sentiment surrounding the Euro-zone bond markets which also helped bolster Euro sentiment with some optimism that budget deficits could be brought under control without triggering a renewed recession. Sentiment could still reverse rapidly given the underlying structural vulnerability and the Euro has still been dependant on a reduction in short positions to make strong headway.
The US ISM index for the services sector dipped to a weaker than expected 53.8 for June from 55.4 the previous month. Most components were lower over the month and the employment component dipped to just below the 50 level. The data will reinforce expectations that the economy is slowing and there will also be a further scaling back of expectations surrounding any increase in interest rates by the Federal Reserve.
The dollar was hampered by the decline in yield support and defensive demand for the US currency also failed to appear as stock-markets remained higher with some loss of confidence in the dollar a notable feature as fundamental doubts have increased. In this environment, the dollar weakened to lows around 1.2660 before a tentative recovery to 1.2620. The Euro drifted slightly weaker on Wednesday with lower equity prices curbing Euro buying support.