EUR-USD Retreats After FOMC-Inspired Rally

EUR/USD rallied yesterday after the Federal Open Market Committee made an emergency interest rate cut. But the currency pair was declining ever since the initial rally amid speculations that the European Central Bank may follow suit, and today it is trading firmly below the opening level. Better-than-expected US employment data further weighed on the currency pair. US manufacturing data was confusing as reports from Markit and the Institute for Supply Management provided conflicting results.

ADP employment rose by 183k in February on a seasonally adjusted basis, exceeding the median forecast of 170k. The previous month’s gain got a huge negative revision from 291k to 209k. (Event A on the chart.)

Markit services PMI dropped to 49.4 in February from 53.4 in January, unrevised from the flash estimate and matching forecasts. (Event B on the chart.)

ISM services PMI, on the other hand, climbed to 57.3% in February from 55.5% in January, whereas analysts had predicted a drop to 54.9%. (Event C on the chart.)

US crude oil inventories rose by 0.8 million barrels last week versus an increase of 2.8 million barrels predicted by experts but remained below the five-year average for this time of year. The stockpiles were up by 0.5 million barrels the week before. Total motor gasoline inventories dropped by 4.3 million barrels, though stayed above the five-year average. (Event D on the chart.)

Yesterday, FOMC surprised markets, cutting the target range for the federal funds rate by 50 basis points. (Not shown on the chart.) As one could expect, the coronavirus was the reason for such a move as the statement said:

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent.

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