The Euro softened against the Pound, US Dollar and other major peers on Monday after data showed that manufacturing activity in the 18-member Eurozone eased in May.
Concerns over the region’s economic recovery are growing as today’s data adds to a growing list of disappointing figures.
Unemployment in the Eurozone remains stuck close to record high levels, and the threat of the region slipping into a deflationary cycle is growing.
According to Markit’s Eurozone Purchasing Managers Index, activity in the regions factory sector slowed last month after being weighed upon by the weak French economy and a slower growth rate in Germany.
France slid back into contraction territory, suggesting much more needs to be done to address the competitiveness of the country’s goods producers. In Germany, the pace of expansion eased, possibly linked to some concerns over the situation in Ukraine, or perhaps due to the late timing of the Easter holiday.
The region’s PMI eased from April’s figure of 53.4 to 52.2 in May. Any figure above 50 indicates expansion whereas one below indicates contraction.
“The survey will inevitably add to the clamour for policymakers to provide a renewed, substantial boost to the region’s economy and ward off the threat of deflation,” said Markit’s chief economist Chris Williamson.
Despite the drops in activity in France and Germany there was some positive news from the report.
Spain performed very well last month with its PMI rising to its highest level in 49-months. The Netherlands too saw an improvement with activity reaching a 2-month high.
Further gains for the Pound were restrained after data showed that manufacturing growth in the UK eased slightly in May but remained positive. The UK’s PMI came in at 57.0, slightly down on the previous month’s figure of 57.3.
A separate report released by the Bank of England showed that the number of mortgage approvals granted in the UK fell to a nine-month low in April after the nations’ banks tightened their lending rules.
Approvals declined to 62,918 from 66,563, the third monthly decline recorded since the six-year high achieved in January.
The US Dollar meanwhile strengthened to a three-month high against the Euro as economists raised their bets that this afternoons US manufacturing data will come in strongly and show that activity in the sector expanded at its fastest pace this year.
The Euro is expected to weaken further against both the Pound and US Dollar on Tuesday as data is forecast to show that Eurozone inflation slowed further last month and the regions unemployment remains close to record highs.
Investors are also raising their bets that the European Central Bank could cut interest rates on Thursday in an effort to stave off the threat of deflation. Other monetary easing measures are also expected. Depending on what those measures are we can expect the Euro to fall sharply.
The Euro fell further against the Pound and US Dollar on Monday afternoon after data out of Germany showed that the annual rate of inflation in the Eurozone’s largest economy almost halved last month.
The data makes it all but certain that the European Central Bank will introduce new monetary easing measures at Thursday’s policy meeting.
The sharp drop of the German inflation rate added to a weaker than forecast Eurozone manufacturing PMI report and raised concerns over the health of the region’s economy.
According to the EU the rate of inflation in Germany fell from 1.1% in April to 0.6% in May. The data adds to slowing rates already recorded in Italy, Spain and Belgium.
The overall annual rate of inflation is now forecast to come in at just 0.5% tomorrow.
“The slowdown in Euro-zone manufacturing activity in May reinforces belief that the ECB will deliver a package of measures at its June 5th policy meeting, including interest rate cuts and liquidity measures,” said Howard Archer, an economist at IHS Global Insight.
To stave off the threat of deflation the ECB is expected to introduce negative rates on bank deposits and could see it implement quantitative easing measures in an effort to try to stimulate growth.
Euro to GBP Updated: 03/06/2014
Both the Euro to GBP and Euro to USD pairings experienced modest movement on Tuesday as investors digested mixed economic reports for the Eurozone.
A comparatively upbeat employment report for the 18-nation currency bloc was outweighed by concerning inflation data and the Euro weakened slightly against several of its major rivals as a result.
The Eurozone’s unemployment rate dropped to its lowest level since the close of 2012 in April, easing from 11.8 per cent in March to 11.7 per cent.
However, despite this modest improvement, almost 19 million people remained unemployed in the currency bloc. The level of joblessness also varies from a low of 4.9 per cent to a high of over 25 per cent.
A separate report showed that Eurozone inflation fell from 0.7 per cent in April to 0.5 per cent last month.
The result was shy of expectations and has upped the odds of the European Central Bank announcing additional stimulus measures when it gathers on Thursday.
As yesterday’s German inflation report printed below forecast levels, economists had expected today’s Eurozone figure to disappoint expectations.
Despite this, the Euro still registered modest declines against the Pound following the report’s publication. The EUR/USD pairing was little-changed.
As stated by European economist Jonathan Loynes; ‘The fact that inflation is so low and so far below target is clearly contributing to the general pressure on the ECB to do more. Draghi, not surprisingly, has played down the threat of deflation, but as inflation has fallen further it’s pretty clear it’s having an influence on their thinking.’
Although economists are focusing on the upcoming ECB meeting, volatility in the Euro could still be caused by global economic developments, such as today’s US factory orders report and tomorrow’s US ADP employment change figure.
Services and growth figures for the Eurozone will also be of particular interest.
Key Euro data releases
Tuesday 6th of June – Eurozone inflation data
Eurozone unemployment data
Wednesday 7th of June – Eurozone Services PMI data
Eurozone GDP (estimated)
Thursday 8th of June – Eurozone Retail Sales data
ECB Interest rate decision
Euro (EUR) Exchange Rates
[table width=”100%” colwidth=”50|50|50|50|50″ colalign=”left|left|left|left|left”]
Currency, ,Currency,Rate ,
Euro,
,US Dollar,1.3597,
Euro,,British Pound,0.8111,
Euro,,Australian Dollar,1.4662,
Euro,,New Zealand Dollar,1.6067,
Euro,,Canadian Dollar,1.4828,
[/table]
