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- EURUSD slips as PMI surveys, strong USD, EU election weigh.
- EUR PMIs miss. GER industrial downturn deepens, services cools.
- EUR set to follow economic growth lower says Societe Generale.
The Euro slipped lower Thursday following another disappointing round of IHS Markit PMI surveys and as markets braced for the outcome of European parliament elections that are now running until Sunday, but analysts say the single currency is set to follow economic growth lower over the coming months.
Both Eurozone manufacturing and services PMI survey results surprised on the downside Thursday, prompting economists to claim growth likely slowed during the second-quarter of the year, although it won't be until August that official data for the period is available.
The Eurozone manufacturing PMI fell from 47.9 to 47.7 in May when consensus was for an increase to 48.2. The services PMI also disappointed the market when it fell from 52.8 to 52.5, as markets were looking for 53.0.
Declines were aided falls in both PMI surveys for Germany, the Eurozone's largest economy, which saw an industrial recession deepen and the expansion in a previously-robust services sector cool during the current month.
Above: EUR/USD correlation with GDP growth expectations. Source: Societe Generale.
"With a lot of the one-off factors plaguing the eurozone having already reversed, this data on industry is concerning. If indeed manufacturing production continues to decline for a prolonged period, this will worsen the outlook for the service sector," says Bert Colijn, an economist at ING Group. "Without the hard data for Q2, it's difficult to come to strong conclusions on the growth rate of the quarter so far though. For the ECB though, today’s PMI will confirm a slow-growth environment in which inflation is unlikely to accelerate anytime soon."
PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.
Markets care about PMI data because it is an important indicator of momentum within the economy. And economic growth has direct bearing on consumer price pressures, which dictate where interest rates will go next.
"The details are generally depressing reading. Growth in new orders and output remains overall subdued, which has dragged employment growth down to a three-year low. Adding insult to injury, firms’ outlook for the future weakened to a four-and-a-half year low, and selling prices are contained by competition. The upshot is that the hard data have so far been much better than this overall sombre message, but we suspect that the Q2 numbers will come in more closely with the surveys," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.
Above: Eurozone PMI index and correlation with GDP growth. Source: Pantheon Macroeconomics.
"The euro-zone flash PMIs for May remained fairly weak, suggesting that the euro-zone economy slowed in Q2. Meanwhile, the Ifo Business Climate Index also edged down pointing to a continued industrial recession in Germany," says Christina Iacovides at Capital Economics.
The Eurozone economy grew by 0.4% in the first-quarter of 2019, after slowing sharply in the second half of 2018. Growth forecasts for 2019 were already bombed out when, at the beginning of May, the U.S.-China trade war that hurt the Eurozone economy so much last year flared up again.
President Donald Trump has lifted from 10% to 25% the tariff charged on $200 bn of imports from China in response its alleged backtracking on commitments made earlier in negotiations aimed at addressing its "unfair trade practices".
Trump is now threatening to impose a 25% tariff on all of China's remaining exports to the U.S., which clock up to roughly another $300 bn each year. Eurozone growth halved from 0.4% to 0.2% during the third quarter of 2018, when the initial U.S.-China tariffs were implemented.
"EUR/USD correlations with relative rates/yields have broken down and it's all about growth now. Where is Eurozone GDP growth heading?" asks Kit Juckes, chief FX strategist at Societe Generale. "The consensus today looks for 2019 US GDP growth of 2.6%, as recession fears ae pushed further into the future. The 2020 consensus is a reasonably robust 1.9%. the Eurozone 2019 consensus by contrast has fallen to 1.2%, from 2% a year ago and the 2020 consensus has fallen from 1.8% at the start of last year to 1.4% now."
Above: Euro-to-Dollar rate shown at daily intervals.
"EUR/USD remains on the defensive while capped by the 55 day moving average at 1.1237. While we remain unable to rule out a test of the 1.1110 April low, but we look for this to hold. We note the 13 count on the 60 minute chart and this suggests an attempt an near term stabilisation is likely. We need to regain the 55 day ma in order to alleviate immediate downside pressure," says Karen Jones, head of technical analysis at Commerzbank.
The Euro-to-Dollar rate was quoted -0.18% lower at 1.1135 following the reports Thursday and has now declined by 2.9% for 2019.
Price action came after minutes from the May Federal Reserve (Fed) meeting suggested markets are wrong in betting it will cut its interest rate before the year is out, helping the greenback rise broadly and putting the Euro-to-Dollar rate on its back foot even before the PMI surveys were out.
"This trade war certainly hasn’t hurt the dollar so far and last night’s release of the FOMC minutes actually saw FOMC upgrading their US growth forecasts," says Chris Turner, head of FX strategy at ING Group.
Above: Euro-to-Dollar rate shown at weekly intervals.
European elections began on Thursday and are expected to result in Nigel Farage's newly formed Brexit Party becoming the largest delegation of the UK, although results will not be released until Sunday.
When combined with the anticipated anti-establishment contributions of Italy, Hungary, France and others, European Union politics could be set to become much more disfunctional at a time when growth is waining and risks to the outlook are rising.
That won't be good news for the Euro or the European Central Bank (ECB), which has already been forced to delay its 'policy normalisation' until at least 2020. Markets no longer anticipate an ECB rate hike in even 2020.
With the top end of the Fed Funds rate set at 2.5% and the ECB's main refinancing rate at 0%, the Dollar's yield and growth advantages look set to remain a weight around the ankles of the Euro-to-Dollar rate for some time to come.
"It’s hard to keep up with all the escalation," says Michael Every, a strategist at Rabobank. "Populism can reach a point of praxis. In the background the US is breaking-up key Chinese firms and global supply-chains, and Hard Brexit would prompt the same thing for Europe: Lordi, Lord."
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