Euro Rally Stalls as Eco Data Mixed

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Market Drivers August 23, 2012
Chinese PMI drifts lower
EZ PMI Stabilizes but remains recessionary
Nikkei up 0.51% Europe up 0.13%
Oil $98/bbl
Gold $1665/oz.

Europe and Asia:
CHF Trade Balance 2.92B vs. 2.10B
EUR German GDP 0.3% vs. 0.3%
EUR PMI 47.5 vs. 47.7
EUR Eurozone Consumer Confidence n/a
GBP BBA Loans for House Purchase 28.4K vs. 28.2K

North America:
USD Initial Jobless Claims 8:30
USD Markit US PMI Prelim 8:58
USD New Home Sales 10:00
USD House Price Purchase Index

After blasting through the key 1.2500 level yesterday in the wake of surprisingly dovish FOMC minutes, the EUR/USD stalled in morning European trade today after flash PMI data from the region revealed mixed results. The euro hit a seven week high in early morning dealing rising to 1.2570 but failed to extend the rally after the PMI data was released.

German and French PMI data for August printed mixed with French data producing a mild upside surprise while Germany’s composite reading hit a 38 month low. French Manufacturing PMI improved to 46.2 from 43.7 while services PMI rose above the 50 boom bust line to 50.2. In Germany however, Manufacturing improved hitting a 3 month high of 45.1 but services declined sharply to 48.3 from 50.1 slipping into a recessionary territory for the first time since 2009.

According to Markit economics, ”August data pointed to a steep and accelerated reduction in new business received by private sector companies across Germany. The overall pace of decline was the most marked since June 2009, reflecting sharp decreases in both the manufacturing and service sectors. Anecdotal evidence attributed the fall in new work to unfavourable underlying economic conditions and, in some cases, a continued weakening in demand from Southern Europe.”

The overall news suggests that economic conditions in the EZ remain challenging but may have bottomed out for the time being. Nevertheless, growth for the foreseeable future will have to come from the export sector as domestic demand remains weak. The news does a support a more interventionist stance from the ECB, as final demand remains weak and inflation risk is non-existent.

The slowdown in Europe is clearly having knock-on effects globally as today’s Chinese PMI data also missed its mark printing at 47.8 versus 49.3 the month prior. Markets will now turn their focus to US flash PMI numbers due at 14:00 GMT with consensus looking for an essentially flat read of 51.3 versus 51.4.

The rise in EUR/USD has been driven by speculation that the ECB will enhance liquidity and a marked calming of the Club Med credit markets. However, with yields in Spain and Italy flattening out today, the prospect of further gains in the pair remains an open question. Having risen more than 200 points since the start of the week, the euro may see some profit taking ahead of the 1.2600 level which could send it for a retest fo 1.2500 as the day proceeds.

Boris Schlossberg
Managing Director

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