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Can Eurozone PMIs surprise and steady the oversold euro?

Feb 19, 2020
Friday will see the release of both the manufacturing and services activity indices for the eurozone and its two largest economies, France and Germany. There will be much focus on these numbers as the beleaguered export-dependent region tries to deal with the economic fallout from the coronavirus.

January’s composite survey reading hit a five-month high, offering much hope that the region’s fortunes were on the up. However, hard data told a different story and ended last year on a very weak footing. Along with the soft economic figures seen in recent weeks, the ECB may need to lower its GDP growth forecasts at its March meeting.

Coronavirus hit – but for how long?

The outbreak of the coronavirus is the ‘wild card’, as the ECB’s chief economist said recently, which could produce a ‘pretty significant short-term hit on the economy’. Tuesday’s German ZEW index showed a sharp downturn in expectations and was the first clear sign of a hit from the coronavirus in euro-area sentiment. Still, the declines were relatively small in scale in a well-known highly volatile data set, and the gauge is still significantly above where it stood for most of 2018 and 2019.

Manufacturing is most vulnerable to the supply disruptions from the Chinese factory shutdowns, which is just at the time that new orders are starting to point to improvement. So, keep an eye on this index to spot any hit from the shutdowns, although there is the potential for a lagged effect from the Chinese data of another 1-2 months.

Any noticeable fallback in the data may result in another leg lower for EUR/USD, as the market extends their expectations that the ECB will keep rates on hold for longer. The market is currently pricing in around 6bp of easing over the next twelve months.

On the flip side, German (IFO) business expectation momentum suggests we could be close to peak negativity around German data especially. The bar seems quite low for any upside surprise in the current environment.

Global PMIs

IHS Markit will also publish PMIs for the UK and US on Friday. While the former’s economic growth has also been lacklustre, partly driven by uncertainty over its exit from the EU, the UK enjoyed an unexpectedly strong bounce in its PMI in January, following the landslide election victory by the Conservative party.

The big question in the US will be whether the manufacturing sector has taken a hit, while the service sector could be affected by less trading and fewer visitors and tourists.

EUR/USD levels to watch

A double hit of disappointing economic data and coronavirus concerns has sent the euro to its weakest in almost three years. Net EUR shorts also increased $1.3bn in the week, mainly driven by an increase in gross EUR shorts. Yesterday saw the single currency crash through 1.0810 support, having decisively broken the previous cycle low at 1.0877. This rapid pick up in momentum leaves the euro more exposed to further sub-1.08 weakness in the short term, with next support now at 1.0770, ahead of 1.0740. Oversold conditions have still not eased, but only a move above 1.0860 would point to the current weakness subsiding.