Forex Trading Library

First Look at German Business Sentiment for October

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After begin whipsawed yesterday with the results from the Brexit vote in the UK Parliament, the euro is in for another busy day tomorrow with a host of key events.

Before we get to the ECB’s interest rate decision, we have a set of fresh economic data from Europe. The most important and market-moving will be the German PMI.

The flash reading is especially interesting for the markets because it’s a preliminary view for the current month. It has the most up-to-date perception of what’s going on in the economy.

It also typically has a direct impact on the exchange rate. And, with the ECB largely expected to stay the course, it might be the highlight of the trading day.

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What We Are Looking For

We start with France, where we could have our first complication.

Of the three PMI surveys, the one that is most relevant for the euro is the manufacturing measure.

Expectations are for the manufacturing PMI for France to slip back into contraction again at 49.1 compared to 50.1 prior.

Admittedly, this figure has been hovering around the tipping point between contraction and expansion since the beginning of the year. So, the market will likely be sanguine about another PMI below 50.

As for the other measures, we can expect services PMI to stay in expansion at 51.5 compared to 51.1 prior. This should be enough to keep the Composite PMI in the positive as well at 51.1 expected, compared to 50.8 in September.

The Major Event

Germany reports fifteen minutes after France.

Expectations are for manufacturing PMI to deepen into contraction to 40.0 compared to 41.7 las month. This would be a continuation of the downward trend that it has been having for nearly two years at this point. It would also be the worst result since the last major recession, a bad sign for Germany’s future economic prospects.

There is a pretty broad consensus that we’ll get bad news from Germany’s manufacturing sector. This sector is still having trouble with exports.

The recent tariffs applied by the US following the WTO resolution aren’t expected to have any measurable impact. The only positive thing analysts might get from this is that it will increase pressure on the German government to raise spending. However, that’s still a long shot, and it’s fraught with its own problems.

Of course, there is a potential for a surprise on the upside. However, we wouldn’t expect substantial strength in the euro unless the Manufacturing PMI showed a substantial improvement over the trend, so something over 44.

As for the other data from Germany, expectations are for the services PMI to remain in expansion at 51.2 compared to 51.4 last month. Even if this data matches expectations, it could be seen as negative for the euro. It would be a confirmation of the sudden drop in the perspective on the German domestic economy that we saw in September.

Second-Tier Measures

We can expect composite PMI for Germany to remain in contraction at 49.2. This would be an improvement over 48.5 prior despite the consensus that manufacturing will deteriorate.

Half an hour later, we get PMI’s for the eurozone, but they typically have little effect on the market since the market already has a good idea of what to expect after digesting the other major economies.

Still, expectations are for the manufacturing PMI for the eurozone to stay firmly in contraction at 45.0. This would be a worsening from 45.7 prior, and largely being dragged down by Germany.

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