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Euro Trouble: Another Run at Parity

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The latest data could be pointing to further downside for the Euro, even taking into account the recent drop. This trend could accelerate if US figures next week confirm the positive trajectory for the economy. Although another dip into parity for the EURUSD seems still far away, there are some indicators that it might become a possibility. there are some indicators that it might become a possibility, reflecting Euro trouble.

A divergence within an economy is often a warning sign, because typically the interconnectedness of economic processes reinforce each other. Strong growth across the economy in general will bleed over and support some of the weaker areas. However, if one area is underperforming, it’s often a sign that the rest of the economy is in trouble. That’s because there is usually one sector that is more vulnerable, and will be affected first. It would worry economists if the rest of the economy isn’t able to pull up that one sector.

Germany No Longer Leading Europe

In the case of the Euro Area, that one sector might be Germany, which has long been seen as the motor of the shared economy, besides being the largest country. The narrative has now switched to talking about Germany as the “sick man of Europe”. Though German authorities are quick to suggest it’s more that Germany is the tired man of Europe, and just needs a coffee. After the latest PMI data, Germany might need something a little stronger to get back on its feet. Hence, why the Euro was weaker despite the better than anticipated results for the whole economy.

French flash PMI surprised handily to the upside, with the composite jumping up to 47.7 compared to 44.6 prior. But the focus on Germany, where manufacturing PMI cratered to 42.3 from 45.5 prior. Neither country broke the 50 level that would mean a return to expansion, but the sudden retracement in Germany was quite dramatic. Even though the services sector outperformed expectations slightly, manufacturing is the main driver of Europe’s largest economy.

What Does This Mean for the ECB?

The Eurozone Services PMI popped back into expansion by the bare minimum at 50, up from 48.4 prior. But the manufacturing sector was dragged down by Germany, and declined by half a point. The issue is that the “forward looking” components were the worst performers. New orders deteriorated, suggesting that businesses were having difficulty in getting sales as customers were worried about economic uncertainty and adverse financial conditions.

The relatively “high” interest rates set by the ECB are one of the factors that make it difficult for businesses to finance their activities. So, the economy could get a boost if the ECB starts easing up on monetary tightening. The lack of demand means that inflationary pressures are going away, and the central bank could get away with a rate cut sooner without inflation rising.

Who Will Go First?

That might explain why the Euro fared the worst against the pound in the wake of the PMI figures. The UK saw its composite PMI advance, with its manufacturing sector slightly improved over the prior year. The better demand conditions in Britain meant that inflation pressures were more persistent.

In summary, the poor performance in the PMI figures added to mounting evidence that the ECB will more likely be the first of the major central banks to ease. The wider the gap between when the ECB cuts and then other central banks follow, the more likely the EURUSD is to head towards parity again.

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