Composite PMI Data Declines in July
The latest batch of Eurozone data provided more questions than answers ahead of the upcoming ECB meeting this week. The flash composite PMI for the Eurozone declined to 54.3 after a small uptick to 54.9 in June, printing below the market forecast.
The breakdown of the data highlights a cause for concern as although the manufacturing sector output index remained stable over the month it fell to 54.4 in the services sector. More importantly, new orders in both sectors saw their smallest increase since October 2016 highlighting the risk of a further contraction in the rate of expansion over the near term. The trade dispute between the US and the Eurozone looks to already be having a negative impact as new orders in the manufacturing sector saw their smallest increase since August 2016. However, it is worth noting that job creation continues to be firm, which should provide a boost to domestic demand.
The fall back in the composite PMI is clearly a disappointment though the current levels do still suggest that the economic recovery in the Eurozone is on firm ground and bulls will be taking this as a sign that the ECB is right in its view that the softness in data seen since the start of the year is not the sign of a more serious downturn.
Consumer Confidence Unchanged in July
Indeed, the latest consumer confidence numbers for the Eurozone should further support this view. After seeing a serious drop off in June from 0.2 to -0.6, consumer confidence was unchanged in July stemming the declines seen over recent months despite the ongoing trade and geopolitical events.
Despite the pause, it seems clear that the peak of consumer confidence in the Eurozone is likely behind us given the current climate of increase trade disputes and rising political turmoil. Furthermore, with energy prices having shot up recently, inflation is now close to 2% and with wage growth having increased only slightly, purchasing power hasn’t improved to any significant extent, further weighing on consumer confidence.
In all, it seems that the recent data readings we’ve seen from the Eurozone will have done little to encourage the ECB and as such, the July meeting is likely to be rather a non-event. The bank signaled last time around that it intends to wind down its QE program by the end of the year, with rates due to stay at current levels until at least summer 2019. The real risk, however, is if data continues to print weakly over the rest of the year, the ECB might opt to keep QE running into next year also, keeping rates on hold for longer.
The market reaction to the last ECB meeting has been a strong unwinding of the record long position that built up over the first quarter. This upside exposure has now been dismantled by around 80%, highlighting the market’s disappointment with the ECB. This latest data, ahead of the ECB this week, has the potential, to cause a further unwinding of long positions.
The current block of consolidation in EURUSD keeps the prospect of a large head and shoulders pattern in play. If we see a rally from current levels, look to the 1.2042 – 1.2113 region to provide resistance as the potential right shoulder of the pattern which should signal a larger downward move in EURUSD over the medium term. Alternatively, if we see a break below the 1.1466 level the pattern is negated and focus will shift to immediate downside as momentum players join the market.