Euro slides as strong US PMI data lifts Fed rate hike bets

On Wednesday, the Euro (EUR) experienced a decline against the US Dollar (USD) as robust US business activity figures bolstered predictions of additional Federal Reserve (Fed) rate hikes, boosting the value of the US Dollar. The preliminary S&P Global US Composite Purchasing Managers’ Index (PMI) for September rose to 58.4, up from 56.0 in August, with both manufacturing and services PMIs surpassing expectations.

These readings also marked an improvement from the previous month. Elevated business prices, highlighted in the survey, contributed to inflation concerns. The US Dollar had already attracted investors following the Fed's 25 basis point rate increase last week and indications of a potential further hike to combat inflation. Eurozone PMI data, announced earlier, also exceeded expectations and remained in expansion mode, supporting the possibility of another European Central Bank (ECB) rate increase.

ECB policymaker Joachim Nagel cautioned that core inflation was still high, though he had not observed significant secondary effects from higher oil prices. Middle East developments remained a central focus; an Iranian official disclosed discussions during indirect talks with the US regarding reopening the Strait of Hormuz and lifting the US blockade.

The Fed's mandate is to attain price stability and promote full employment, with its primary instrument being interest rate adjustments. Higher interest rates increase borrowing costs, strengthening the US Dollar and weakening other currencies, whereas lower rates encourage borrowing, weakening the Greenback. The Fed convenes eight policy meetings annually, where the Federal Open Market Committee (FOMC) deliberates economic conditions and determines monetary policy.

In extreme circumstances, the Fed may employ Quantitative Easing (QE), a non-standard policy measure used during crises or when inflation is exceptionally low. Gold, meanwhile, experienced a decline as anticipation of additional Fed rate hikes heightened the US Dollar's appeal and exerted downward pressure on the precious metal.