Euro Bears Under Pressure Despite Flash PMIs Seeing Red

  • EUR fails to rollover on soft flash numbers
  • ECB chief economist sees Europe on growth track
  • Hawkish talk on Greece lifts EUR
  • Far East PMIs reveal significant deterioration

Notwithstanding the lack of fundamental data on show this week, the EUR bear has been trying valiantly to build up a head of steam ahead of tomorrow’s important Eurogroup meeting in Riga, Latvia. With the market not yet privy to any new hard developments on the Greek creditor fiasco, the naysayers have been rather content to continue to short the EUR on rallies this week. For some time the EUR/USD has been trading directionless, confined to a jobbing range (€1.0650-€1.0750) post-April nonfarm payrolls.

Earlier this morning, the 19-member single currency looked to be on the verge of rolling over, breaking out of neutral territory on the back of weaker European flash purchasing managers’ index (PMI) data. With a Grexit a potential reality, combined with further weakness in the eurozone’s core, it would be considered a potent mix for the EUR bear. Ahead of European economic releases, the EUR had teased with stop-losses below €1.0660. Alas, the single unit has managed to provisionally survive the weaker flash data.

The unit has been dragged temporarily higher on favorable rhetoric from Eurogroup head Jeroen Dijsselbloem who said there was progress in the Greek talks, and by the European Central Bank’s (ECB) chief economist Peter Praet’s belief that the eurozone’s economy is getting back on the growth track. Investors should not be surprised that today’s price action could continue along the same vein during the North American session. The EUR bear needs a break of substance through €1.0660 (this week’s lows) to open up the door to last week’s €1.0624 region. Any loss of momentum for the EUR bear is likely to see the market return to the upper echelon of this week’s range, again waiting for any tidbits on Greece.

European and Far East PMI data disappoints

Flash composite PMI data this morning shows that the eurozone’s economy slowed slightly this month (53.5 versus 54). Nonetheless, it does continue to grow at a faster pace than in recent years.

To the optimist, it seems the eurozone economy may be emerging from near stagnation, aided by lower oil prices, a weakening EUR, and a stoic ECB. However, the fall in the eurozone composite could also suggest that fears over Greece might already be starting to dampen growth in the region. The composite headline fall reflected declines in both the manufacturing and services components.

The country breakdown revealed a small fall in the German index, but at 54.2, it remains at a relatively high level and is consistent with fairly decent gross domestic product growth for now. But the French composite, Europe’s second-largest economy, has edged back toward stagnation (50.2) as export orders fall at the fastest pace in six months. It seems that the weaker EUR is not offsetting that country’s loss of competitiveness.

Collectively, the PMI data would suggest that the eurozone could be failing to gather momentum in the second quarter, and with fears of a Grexit becoming a reality, it will only raise further the threat of renewed economic slowdown for the region.

China and Japan Tell the Same Tale

Earlier, leading manufacturing indicators for the Far East also pointed to a difficult start for the second quarter, as both advance PMIs for China and Japan showed significant deterioration.

In China, the flash manufacturing PMI remained in contraction for the fourth consecutive month, recording a new one-year low print of 49.2. Digging deeper, the data reveled that new orders, along with input and output prices, decreased at a faster rate. This would suggest weakening domestic demand and disinflationary pressures. However, it was not all bad news, the employment component continued to decrease, but at a slower rate, while export orders increased.

In Japan, it too has a similar story, as its manufacturing PMI fell into contraction for the first time in 11 months (49.7). Bank of Japan Governor Haruhiko Kuroda continues to try and paper over the cracks, talking up the Japanese economy despite the data signaling worsening operating conditions. The governor sees the economy in “gradual” recovery — even with core consumer-price index data at +0%, he still sees +2% inflation being within reach.

Despite the softening global PMIs, investors’ immediate focus remains on Europe and Greece. The EUR bear will be sitting nervously heading into the North American session, disappointed by the lack of follow-through from the softer European data. They will be looking to U.S. claims and new home sales data for some reprieve. If no immediate relief can be found, expect the weaker short-EUR positions to come under further pressure as the session proceeds.

Forex heatmap

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell