Tomorrow we get our first major data from Europe for the week. And it’s set to be a pretty important day for the euro!
This is the last major data release ahead of the ECB’s rate decision on Thursday. At the meeting, we’re expecting the ECB to take some kind of easing measure. So, we’ll be looking to see if the PMI data is in line with that view.
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This is the first look at data from Q3. So, it just might give us some insight into what to expect over the next three months. With GDP barely positive, there is plenty of talk of Europe slipping into a technical recession.
The outlook from major businesses across the continent – and especially the largest constituent economy – is rather pessimistic. We’d expect PMI’s to pick up ahead of potential economic improvement. Therefore, we’d also expect a strengthening of the euro.
What We Are Looking For
The PMIs are spread out over a 45 minute period starting at 09:15 CET (03:15 EST). Most of the expected volatility is concentrated at the start of that window. First, we get French PMI data, and it’s usually the one that drives the market since it gives the first insight into how the other points are likely to develop.
Fifteen minutes later, we get the German flash PMIs which are getting a lot of attention lately because of the unusual situation of the German economy underperforming compared to the other large constituents of the eurozone. There is an increasing concern that the driver of the EU economy might not return to growth anytime soon.
Half an hour after that we have the PMIs for the whole euro area, which counterintuitively doesn’t usually move the market all that much. This is usually because we’ve already had the two major constituents’ report. If there is a significant deviation from expectations, though, of course, it can drive the market.
French Manufacturing PMI
This is expected to advance further into growth with 52.1 projected over last month’s 51.9. This is a significant improvement over the earlier parts of the year, furthering an upward trajectory. We also expect the more domestic-focused services PMI is to move further into growth at 53.1 from 52.7. We could expect increasing euro strength if the manufacturing number came in above 52, but a result significantly below that could translate into weakness for the shared currency as it would break the trend.
German Manufacturing PMI
We expect this to recover just slightly but stay firmly in contraction territory at 45.4, up from 45.0 last month. So far, it’s found a floor at 45 and has largely stayed stable just above that level. Consequently, a result below 45.0 would cause expectations of further euro weakness, especially if there was a miss in the French data as well. On the upside, the closer to 50, the better the market would like it.
The Euro Area’s Manufacturing PMI
Expectations are for this to remain in contraction, dragged down by Germany, but to actually get slightly worse at 47.5 compared to 47.6 in the prior month. Since March this series has been hovering around the 47-level and hasn’t been able to make any progress. We wouldn’t expect a strong market reaction unless the result came in significantly far away from that level, either on the downside or to the upside.
Up until recently, it was mostly Germany businesses that had a negative outlook, generally citing problems on the trade front. However, that unease is starting to spread into other parts of the euro area, judging by the trajectories of the PMIs. This would likely put more pressure on the ECB to act in order to support the economy, and if the current trends hold, it would imply further weakness for the euro.