The condition of the European economy is not good. This is confirmed by the recent PMI data for the industry and services. The composite index for the Eurozone fell from 50 pts. to 48.1 pts. in November. This has significantly weakened hopes for a quick economic recovery in Europe. The euro is weak. The declines in the main currency pair were energized, causing the EUR/USD rate to fall below 1.04. Such volatility on the Eurodollar has not been seen for months.
October gave hope for recovery. We received slightly better results and the market quietly assumed that we had passed the bottom, that the worst was behind us. However, Friday’s data brought fears back as there is no sign of improvement but a deterioration in many sectors. The composite index for the industry and services sector has dropped almost two points to the level of 48.1, which means a return to the situation where the Eurozone economy usually ends up in a recession in the past.
A significant deterioration occurred in the services, again reaching a value below the borderline level (49.2 pts.). This is a signal that the sector is shrinking for the first time since January. The rebound in the industry that we saw in previous months was fragile, today’s reading at the level of 45.2 fits into the downward trend.
Aggregate indicators in France and Germany also declined. There is a minimal improvement in the industry with our western neighbor, but the rebound is cosmetic (up to 43.2 pts.) and it will probably take some time before the indicators are again “above the surface” indicating growth. French results are currently among the worst and the cause of the holiday bounce should be sought in the one-time effect of the Olympics. The problems with this economy are now being highlighted.
Changing market expectations for the further path of interest rates in the Euro zone, starting from the December decision by the European Central Bank (ECB), resulted in the sale of the common currency. Such volatility as observed on 22 November, has not been seen on the main currency pair for a long time. Probably this also contributed to the fact that everything took place in the area of key technical support (at 1.0450), the breach of which activated many orders in the market. The Eurodollar has reduced in less than 2 months the increases built for almost a year. Are we heading for parity? If we look at the chart, the distance to this psychological barrier is not so large, so I can imagine such a scenario over the next few weeks. However, we will probably see technical corrections first, as there have been very few in the last 2 months.
Returning to the market valuation, the PMI publication led to the return of the scenario of a rate cut in December by the ECB to the level of 50 basis points. What’s more, a reduction of a similar size in January is very likely. Add to this the unfavorable changes in the political scene in the USA for Europe and the increase in risk factors related to the war in Ukraine, and you get an unfavorable mix of factors that will rather weaken the Euro, at least in the medium term of the next few months.
Author: Łukasz Zembik, Oanda TMS Brokers
Source: https://ceo.com.pl/europa-w-cieniu-recesji-pmi-wskazuje-na-oslabienie-gospodarki-i-euro-68997
