EUR/USD saw recovery after the US ISM Manufacturing PMI data fell below expectations, weighing on the US Dollar. The Euro traded at around 1.1706, rebounding from an intraday low of approximately 1.1659.
The ISM Manufacturing PMI for December was 47.9, below the forecast of 48.3 and lower than November’s 48.2. The Employment Index within the PMI rose slightly from 44 in November to 44.9 in December, yet remained in contraction territory.
US Dollar Eases After Weak PMI Report
The US Dollar initially gained due to safe-haven demand following a US military operation in Venezuela. However, it eased after the weak PMI report, with the US Dollar Index trading around 98.30.
There is an ongoing policy divergence between the Fed, likely on an easing path, and the ECB, anticipated to keep rates steady amid steady growth. Attention now shifts to major upcoming US and Eurozone data releases, including the US Nonfarm Payrolls report on Friday.
The US Dollar plays a critical role in global finance, accounting for over 88% of all foreign exchange transactions. The Federal Reserve influences its value through monetary policy, adjusting interest rates and engaging in quantitative easing or tightening as required.
We see the weaker-than-expected US ISM data as a clear signal of continued manufacturing weakness. This reading reinforces market expectations for two Federal Reserve rate cuts this year. The immediate bounce in EUR/USD above 1.1700 is a direct result of this sentiment shift.
Policy Divergence and Economic Outlook
The policy divergence between the Fed and the European Central Bank remains the central theme, a dynamic we watched build throughout the chaos of 2025. While the US is facing cooling economic data, the Eurozone is showing more resilience. This fundamental difference should continue to favor the Euro over the US Dollar in the medium term.
This latest ISM reading of 47.9 marks the 15th month of contractionary manufacturing activity in the past 16 months. In contrast, recent Eurostat data showed headline inflation in the Euro area holding at a stubborn 2.2%, supporting the European Central Bank’s decision to maintain its current stance. This growing economic divide is becoming more pronounced.
Given the high-impact Nonfarm Payrolls report due this Friday, we should consider buying short-dated EUR/USD call options. A strike price around 1.1750 or 1.1800 with an expiry next week would position us to profit from a weaker-than-expected jobs number. This strategy limits our downside risk if the data surprises to the upside.
The geopolitical situation in Venezuela introduces short-term volatility, but we believe the underlying economic data is the more dominant driver. A surprisingly strong jobs report is the primary risk to a long Euro position. We should therefore keep our position sizes modest ahead of Friday’s release.
We are also watching the US Dollar Index closely for a break below the 98.00 level, which would confirm a broader bearish trend for the dollar. The simultaneous surge in gold past $4,400 an ounce further supports the view of dollar weakness. These inter-market signals strengthen our conviction for a higher EUR/USD exchange rate.
