Euro Drops as Strong US PMI Data Boosts Fed Rate Hike Bets

The euro extended its intraday losses against the US dollar on Wednesday, trading near 1.13931, close to lows seen since late July. Strong US S&P Global business activity data, which far exceeded market expectations, directly reinforced investor bets that the Federal Reserve will continue tightening monetary policy, thereby boosting the dollar and putting significant pressure on the euro.

**Strong US Data Lifts Dollar**

Latest data showed the US September S&P Global Composite PMI flash reading came in at 54.0, above the expected 54.3, while the Services PMI flash reading hit 53.2, well above the forecast of 52.7. This series of data indicates that the US economy, particularly the services sector, remains fairly resilient. Better-than-expected economic performance provides more room for the Fed to continue raising interest rates in its fight against inflation. Markets quickly adjusted expectations accordingly, with bets on another Fed rate hike heating up, giving the US dollar index strong buying support.

**Weak Eurozone Economy, Divergent Policy Outlook**

In stark contrast to the US, PMI data released the same day for the eurozone and its major member states broadly missed expectations. The eurozone September Composite PMI flash reading was 50.9, below the expected 51.1; Germany's Manufacturing PMI flash reading, for its largest economy, was just 48.3, below the expected 48.0, still mired in contraction territory. The divergence in US and eurozone economic fundamentals, and the potential resulting divergence in monetary policy paths—namely the Fed maintaining a hawkish stance while the European Central Bank may slow its pace of rate hikes due to economic weakness—are the underlying reasons weighing on the euro-dollar exchange rate.

**Euro Likely to Stay Weak in Near Term**

Against the backdrop of strong US data and renewed Fed rate hike expectations, the dollar is expected to remain strong in the near term. Unless eurozone economic data shows surprising improvement, or the European Central Bank signals a more resolute tightening stance, the euro-dollar exchange rate may continue to trade under pressure near current lows. Markets will now closely watch remarks from Fed officials for more clues on the future path of interest rates.