Euro under pressure after weak PMI data

The world’s main currency pair turns back after weak eurozone PMI data. Uncertainty following the Fed’s more aggressive rate cut still hangs in the air. The domestic currency is slightly weaker with a drop in EUR/USD.

No optimism after data

The key event of the day is the publication of PMI readings for the eurozone, including both the industrial and service sectors. It must be admitted that across the board, with minor exceptions, there is a sense of disappointment with the results, which may suggest a worsening economic situation on our continent. For example, the PMI reading for the German industry has dropped even lower, to a level of 40.3 points from a result of 42.4 points the previous month. The situation in services of our western neighbor is also not encouraging. A result of 50.6 points is a worsening situation from a month ago and we are approaching dangerously close to the 50-point level, separating growth from a recession. The biggest disappointment is the sudden collapse in services in France, where analysts expected 55 points, but the publication showed a mere 48.3 points. The deepening economic problems of the eurozone countries are not going hand in hand with the ECB’s approach to interest rates. The central bank declared just a few days ago that cuts in the cost of money will occur irregularly, from time to time in relation to data, which the market interpreted as: once a quarter. Looking at today’s data, this may not be enough to avoid a recession.

There is still uncertainty in the minds of investors about the reasons for the sudden rate cut by the Fed. In theory, one can evaluate the health of the American economy positively and so far, there were no signals suggesting an upcoming recession requiring us to act “sharp”. However, this is exactly how we should interpret the movement of 50 basis points at the last meeting. It should be added how different the economic situations are in the US and the eurozone. Despite this, the Fed decided on such a move. This may plant an idea in investors’ minds: perhaps there is more to it than we know and things are much worse than the data shows? The key indicator for the sensibility of the Fed’s move could be the PCE inflation reading on Friday and the lack of a bounce. EUR/USD starts the week with a decrease, but it seems this is the euro’s weakness after the negative PMI data.

PLN on the defensive

The downward move in the world’s main currency pair has a negative impact on the PLN’s exchange rate. The domestic currency loses a little to the euro, a mere 0.15%, but to the USD/PLN it is already 0.5% and a move towards 3.85. The decision by Moody’s on the rating for Poland, which eventually remained at the same level, did not influence the PLN rate. Some analysts predicted a scenario of worsening prospects for our credit rating due to a growing deficit planned for the next fiscal year. Today, we also learned the August retail sales reading, and the result turned out to be slightly worse than analysts’ expectations (3.2% vs 3.4%). On the 23.09 agenda are also PMI readings for the USA, however, these are not as important as there is usually a much higher importance placed on ISM.

Author: Krzysztof Pawlak, Currency Analyst at Walutomat.pl