The event that could have the most significant impact on the Euro and pound this week is the release of Tuesday’s Global Flash PMI figures. Part of that has to do with both currencies being affected by cross-Atlantic asset flows. The latest decision by the Fed could accelerate the trend that has been helping support both currencies.
However, that depends on the economic situation in Europe. One of the early indicators of economic health is the survey of purchasing managers, or PMI. Markets are hoping that the EU and UK economies will accelerate growth in the coming months, justifying buying sterling- and Euro-denominated assets. If the data disappoints, then the trend for both currencies could reverse.
An Early Insight into Growth
PMIs are particularly useful because they measure whether the economy is showing signs of expansion or contraction. Above 50 means expansion: Purchasing managers are buying more, seeing more sales, and positive pricing trends. The survey is conducted throughout the month, and then aggregated into an index.
The flash figures receive extra attention because they provide a partial view of the month’s survey results so far. Often, it is predictive of the final result. That means traders can get a look at what’s going on in the economy in almost real time. As for how the market reacts, a substantial deviation from economic forecasts will leave the currency pairs adjusting in anticipation of a shift in economic direction.
The Euroarea Still in Recovery Mode
German PMIs, as the largest economy in Europe, get particular attention. This time around, it will be important because the expectation is for the country’s manufacturing sector to finally make it out of contraction after more than three years. While the Euroarea is still expected to see sluggish growth for a while, an optimistic scenario in Germany could help investors decide to keep investing in Europe. That, in turn, would help the Euro continue its upward trajectory, aided by a potentially weaker dollar.
German flash September manufacturing PMI is forecast to rise to 50.1 from 49.8 a month ago. Three decimals is not a vast improvement, but moving into expansion could have a significant psychological component. The composite PMI for the Eurozone is expected to see a marginal improvement to 51.1 from 51.0 in August.
UK Still Needs More Growth
The situation for the UK is a little more complex. The start of September saw the largest outflow in years from the stock market. Investors are worried that the government will be forced to raise taxes, which would slow down profit growth among UK businesses. In turn, this meant that investors were selling pounds to move their assets to areas where more growth is expected. If the British economy were to manage unexpected growth now, it would mean the government could collect more revenue and leave taxes at the current levels. That might help reassure investors and help support the pound.
However, the expectation is for the UK flash September PMI to come in at 47.2, up slightly from 47.0 prior. That’s well into contraction territory. A further contraction could leave investors selling even more UK assets and weighing on the pound.
