Euro slides below 1.10 mark on dismal PMI numbers

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24 September 2019

thomasdodds

The euro was sent crashing back below the 1.10 level against the US dollar on Monday, driven sharply lower following a pretty abysmal set of business activity PMI data out of the Euro Area.

A
ll of the major PMI numbers came in well short of expectations in September, causing investors to fret that a more sustained slowdown in the Eurozone economy could be on the cards in the final few months of the year. The services index fell to an eight month low 52.0, well short of the 53.3 that investors had priced in. Manufacturing activity meanwhile contracted at its fastest pace in seven years, with the index capitulating to 45.6 from the previous 47.0 (Figure 1). Much of this slowdown was driven by the German manufacturing index, which fell off a cliff this month to its lowest level in a decade.

Figure 1: Eurozone Composite PMI (2016 – 2019)

These numbers suggest that a German recession is now firmly on the cards in the third quarter. There is also now a reasonable argument to suggest that the Eurozone could follow suit, which would give policymakers at the European Central Bank no incentive whatsoever to alter the bank’s highly accommodative policy any time soon. President Mario Draghi stated yesterday that the slowdown was proving deeper than initially expected. He also reiterated that the bank was ready to use all instruments to protect the economy, suggesting that additional QE or even another rate cut cannot be ruled out in the coming months.

While the euro did recover some of its early losses as trading progressed on Monday, it remains languishing just shy of the 1.10 level and its lowest level since the September ECB meeting.

Pound jumps after Supreme Court ruling

The pound rallied sharply against its major peers on Tuesday morning after the Supreme Court ruled that Boris Johnson’s suspension of parliament was indeed unlawful.

According to the Supreme Court president, ‘the decision to advise Her Majesty to prorogue Parliament was unlawful because it had the effect of frustrating or preventing the ability of Parliament to carry out its constitutional functions without reasonable justification’. The reason why sterling rallied on the news is that it should, in theory, allow members of parliament to return earlier-than-expected, giving them additional time to put in place measures that could block a ‘no deal’ Brexit at the end of October.

Economic data was largely better-than-expected in the US on Monday, with the composite PMI beating the consensus. Macroeconomic news out of the world’s largest economy is relatively light in the next couple of days. We instead look towards Thursday’s Q2 GDP numbers, although they are expected to remain unrevised from the preliminary estimate.