The EURUSD has come under renewed pressure, falling to lows not seen since August. Part of that can be explained by the hawkish shift at the Fed amid ongoing geopolitical themes. But, recently, the market has started to express some doubts about how far the ECB will go with rate hikes, weighing on the shared currency.
One of the factors is the economic outlook, which is particularly relevant ahead Wednesday’s Global Flash PMIs, which will provide important insight into the performance of major global economies. With most major central banks poised to raise rates, the factor that is affect currencies is how fast and slow they hike. The main mediating difference is economic growth, and PMI figures are leading indicators of where GDP trends might be headed.
How Fast Can They Hike?
Markets are broadly in line with expectations that major central banks like the ECB, the Fed, the BoE and the BOJ will all raise rates by the end of the year. However, the relative odds are somewhat different, with the markets pricing in a near-certain ECB hike by the end of the year. This contrasts with just 72% odds for the BoE and 63% odds for the Fed.
In other words, the ECB is perceived by the market to be the most hawkish of the major central banks. But, this relies on the economy continuing to grow, because rate hikes slow growth. If there are signs that the Eurozone economy might falter in the third quarter, then the market could cut back its hawkish bias. Conversely, if UK or US PMIs outperform, then the odds of a rate hike in those countries could rise. This could cause relative fluctuations in their currency pairs.
A Second Inflation Wave?
Earlier today, ECB Chief Economist Philip Lane make the case for continued hawkishness, warning of a “second wave of prices” affecting oil and gas costs. He argued that inflation is likely to be higher and more persistent until the middle of next year, noting higher goods prices. However, he reiterated the view shared by other members of the ECB that prices will stabilize in the middle of next year.
Traders will be looking closely at the upcoming Global Flash PMIs for signs that higher rates are causing the economy to slow, and if price pressures remain elevated. A miss in PMI figures could likely be interpreted as a sign that the economy might falter, and could lower the odds of a rate hike.
What the Market is Looking For
First to report are France and German PMIs, which can set the tone for the Eurozone measure and move the markets ahead of time. French Composite Flash September PMI is projected to improve to 49.1 from 48.5. However, that’s still below 50 and in contraction territory. German manufacturing is expected to stay firmly in expansion at 54.0, but decline from 54.3 amid higher energy costs. Eurozone Composite PMI is projected to ease to 51.7 from 52.0, but approaching the 50 level that could be of concern.
Meanwhile, the UK composite PMI is anticipated to remain in expansion at 52.3, practically unchanged from 52.5 a month earlier. The market is pricing in more hikes than economists project, so a beat or miss here could move the odds of a December hike. For the US, Composite PMI is projected to decline to 55.2 from 56.0, the most expansionary of the major economies. If it stays above 55, the Fed will likely have free reign to hike as many times as it likes.
With Global Flash PMIs offering a broad snapshot of economic momentum across the major economies, traders will be watching the results for clues on the relative strength of growth and the potential path of monetary policy.
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