After bouncing off a 17-month low last week, EURUSD has struggled to gain momentum and has begun trending lower in early trading on Thursday. A combination of multiple factors has kept the shared currency under pressure, but a data release next week could potentially offer some relief.
Friday’s release of Global Flash PMIs comes at a crucial moment ahead of a series of central bank decisions that are likely to set the course for currencies through the rest of the year. Global inflation pressure from energy prices has made virtually all central banks more hawkish, but the degree to which they can actually hike will determine the market’s reaction. What is emerging as the key factor for monetary policy, and therefore for forex markets, is relative economic performance. The upcoming Global Flash PMIs will provide valuable insight into how the economies are doing, and could shake up the currency markets.
Focus on the Eurozone Amid Geopolitical Fractures
Although there will be data releases for Japan, the UK and the US, the market is likely to zero in on the Eurozone Flash October PMI figures. That’s because the data provides advance insight into how the economy is performing, and that could be particularly relevant ahead of the release of Q3 figures and the ECB rate decision next week.
The ECB has notably turned more dovish over the last few weeks, after being one of the more aggressive central banks in the summer. It turns out that Europe is particularly vulnerable to global energy shocks, and its economy is being affected by more than just higher energy prices.
Divergence in the Eurozone Means Euro Weakness
Normally, a central bank will raise rates to head off higher inflation, and this appears to be the ECB’s initial intention. But the usual economic dynamics within the Eurozone have flipped, with so-called “periphery” countries like Spain, Italy and Portugal seeing solid economic growth. Meanwhile, “core” countries like Germany and particularly France are struggling to grow.
A traditional way to deal with sluggish growth is to expand public spending, but with the French deficit already at 6% of GDP, there seems little room for stimulus. Germany has already embarked on a large spending program, but is still expected to grow by only 1.2% this year. If the ECB continues to raise rates, it could cause a further drag on these economies’ performance. The traditionally hawkish core ECB members are starting to show doubts. But the high performance in the periphery implies that if the ECB doesn’t act, the Euro could be undermined by faster inflation. In either scenario, the Euro is set to get weaker, just as the dollar surges amid global uncertainty and a more aggressive Fed.
What the Market is Looking For
In the past, markets would react to French and German PMIs as they were indicative of the direction of Eurozone data. However, this time traders might be paying closer attention to the differential between the core countries and the survey of the whole shared economy, as that could signal a growing divergence.
French Flash October Composite PMI is projected to fall to 50.1 from 51.1 a month earlier, just barely hanging on to expansion. The German Composite PMI is expected to be better at 53.0, but it’s still a notable drop from the prior 53.8. Eurozone Composite PMI, by contrast, is projected to drop to 52.3 from 53.1 prior. While all the Global Flash PMIs remain above 50 and in expansion, a sudden deceleration could increase pressure on the ECB to hold off on further rate hikes for now, keeping the Euro under pressure. Meanwhile, beats could help reassure markets and maybe help the Euro regain some momentum.
