- EUR/USD rose sharply on Wednesday, enjoying its strongest one-day move in three weeks, as investors digested mixed manufacturing data on both sides of the Atlantic.
The currency pair traded in a tight range between 1.1114 and 1.1194 before settling at 1.1189, down 0.0055 or 0.48% on the session. The euro is coming off one of its worst month of the year, when it tumbled more than 2.85% against the dollar, falling sharply from its level at the start of the month when it surged to nine-month highs above 1.16. In spite of the recent pullback, the euro is still holding onto considerable gains from the start of the year. Since opening the year at 1.08, the euro is up by more than 2.5% against its American counterpart over the first five months of 2016. EUR/USD has still closed under 1.12 in each of the last seven sessions.
EUR/USD likely gained support at 1.1055, the low from March 15 and was met with resistance at 1.1434, the high from May 12.
On Wednesday morning, the dollar suffered steady declines after the U.S. Commerce Department reported that construction spending plummeted 1.8% in April, recording its worst performance since January, 2011. Analysts expected to see an increase of 0.6% for the month. As a result, construction spending over the last year has slowed to 4.5% from 8% in March.
At the same time, the Institute for Supply Management (ISM) said that its Manufacturing Index for May ticked up 0.5 to 51.3, above consensus forecasts of 50.6. The positive reading could be a reflection of a five point jump in the delivery component, which could indicate stronger demand or severe delays in the supply chain. New orders, meanwhile, fell 0.1 to 55.7, while export orders remained unchanged at 52.5 remaining considerably above contraction.
Over the last two weeks, key policymakers from the Federal Open Market Committee (FOMC) have sent strong indications that they could raise short-term interest rates when they convene for a two-day meeting on June 14-15. The FOMC's benchmark Federal Funds Rate has remained steady at its current level between 0.25 and 0.50% in each of its first three meetings this year. Last Friday, Fed chair Janet Yellen said at a closely-watched appearance at Harvard University that it could be appropriate to raise rates in the near-term future if the economy and labor markets continue to show improvement.
Elsewhere, Markit said its euro area Manufacturing PMI index for May fell by 0.2 to 51.5, in line with consensus estimates. In Germany, Manufacturing PMI rose 0.3 to 52.1, but still fell below analysts' forecasts of 52.4.
The dollar also faced severe headwinds from the yen, after Japan prime minister Shinzo Abe rattled foreign exchange markets by delaying a steep sales tax increase by two and a half years until 2019. At the same time, Abe announced the government will unveil a fresh stimulus package at some point this fall, disrupting efforts to tackle one of the world's largest debts. As a result, USD/JPY fell more than 1% to an intraday low of 109.06, dropping to its lowest level in two weeks. Abe's government is proposing a tax hike of 2% from 8% to 10%.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.45% to an intraday low of 95.34 before settling at 95.42. The index has tumbled by more than 4% since early-December when it hovered near 100.