Eurozone activity slowdown brings Euro rally to a halt

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25 July 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Euro’s relentless rally against the US Dollar took a break on Monday with a disappointing set of business activity PMIs out of the Eurozone suggesting the economy in the currency bloc got off to a rocky start in the third quarter.

A
lmost all of the flash PMI readings out of the Euro-area yesterday fell short of expectations with the French manufacturing index the only one to exceed consensus. The headline composite index slipped to 55.8 in July from 56.3, its second straight monthly decline and its lowest level since February (Figure 1). While disappointing, the measure remains well above historical levels and not far shy of the six year high recorded in May.

Figure 1: Eurozone PMIs (2014 – 2017)

Yesterday’s sell-off was relatively modest and the single currency remains over 7% higher against the Dollar since mid-May. The news on a potentially softer performance in the Eurozone economy in the third quarter of the year is unlikely to have any material effect on monetary policy in the currency bloc. The ECB seemingly remains on course to begin normalising policy and announce a tapering in its QE programme before year end following last week’s central bank meeting.

With no major announcements in the Eurozone this week all eyes will be on the FOMC.

Dollar edges off one year low after solid data

Mostly positive economic news out of the US was enough to lift the Dollar off its lowest level in a year on Monday, although investors remain wary of developments on US President Donald Trump’s possible ties with Russia. July’s manufacturing and services PMIs out of the US both came in above expectations. The manufacturing index jumped to 53.2 from 52.0 while the services index remained unchanged at 54.2, both at a healthy enough level that would warrant higher interest rates in our view.

All focus in the currency markets this week will be on this Wednesday’s Federal Reserve meeting with investors hoping to get a gauge on the likelihood of additional rate hikes in the US this year. In the meantime, housing data at 14:00 UK time may receive some attention, although all in all a fairly quiet session of currency trading in terms of market data.

Sterling bounces back after worst week against Euro in nine months

Monday’s disappointing news out of the Eurozone allowed Sterling to edge higher against the common currency, having suffered its worst week in nine months versus the Euro last week. Sterling received some additional support from comments by Britain’s trade minister Liam Fox, who claimed on Sunday that he backed a transition agreement to smooth the UK’s departure from the European Union.

Chief Economist of the Bank of England Andy Haldane will be speaking in the UK this evening. It will be interesting to see his take on the implication of last month’s inflation slowdown on the possibility of an interest rate hike in the UK before year end, given his recent claims that suggest he may soon vote for an immediate rate increase.

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