EUR/USD is trading near its highest level since October 1 as Eurozone PMI data showed a modest slowdown, while German ZEW expectations improved sharply. The relative policy stance of the ECB, seen as more resilient compared with the Fed’s easing trajectory, continues to underpin the euro’s strength, BBH FX analysts report.

ECB-Fed policy divergence supports Euro strength

"EUR/USD is trading near its highest level since October 1. Eurozone PMI slips in December, but the growth outlook remains encouraging. The composite PMI fell more than expected to a three-month low at 51.9 (consensus: 52.6) vs. 52.8 in November due to a slight contraction in the manufacturing sector (attributable to German industry) and weaker momentum in the service sector (attributable to stagnant services activity in France)."

"In parallel, the German December ZEW investor economic sentiment expectations index improved to a five-month high at 45.8 (consensus: 38.4) vs. 38.5 in November, consistent with resilient economic activity."

"The ECB is in a good place to keep rates on hold for some time while the Fed has more easing in the pipeline. As such, relative ECB/Fed policy stance underpins the uptrend in EUR/USD."