November 22, 2024 – Written by Tim Boyer
STORY LINK EUR to USD Exchange Rate Drops to 1.035 as EU PMIs Miss
PMIs in the EU dropped further, with Services joining Manufacturing in contraction territory.
The euro dropped sharply. EURUSD was down –1.35% and tested 1.035.
One hope for the euro is that PMIs are not yet reflected in hard data such as GDP.
The US dollar has had a remarkable run since late September when it was hovering near the lows of the year and the lows of 2023. An 8% rally in under two months has taken it to new yearly highs and above the 2023 peak.
Much of the rally has been driven by domestic issues. The US economy has stabilized and bounced back from the growth scare at the end of July. Furthermore, the large gain in October was in expectation of a Trump victory in the election. Trump’s protectionist and potentially inflationary policies are a dollar positive. In response to this backdrop, less cuts from the Federal Reserve are expected and Chair Powell recently said he was in “no rush” to ease policy further.
As much as the dollar rally has been driven by domestic positives, weakness in other G7 currencies have also been a major factor. EURUSD fell to 1.033 on Friday following shockingly bad PMI data. This was just the icing on the cake this week as dovish comments from ECB members and the escalation in the Russia / Ukraine war also weighed.
EU PMIs Disappoint Again
Any hope that the ECB’s rate cuts might stimulate the EU economy and lift it out of stagnation are fading. After three cuts, the data is getting worse.
Manufacturing has been weak for some time, especially in Germany, and the German PMI came in at 43.2, deep in contraction territory, but actually slightly better than the 43.1 estimate. The French Manufacturing PMI, however, dropped more than the 44.6 estimate to 43.2. Services PMI in France also dropped sharply to 45.7 when 49.1 was expected. The Olympic-inspired bump has well and truly faded.
All this means the EU composite figures have rolled over into contraction territory below 50. Manufacturing came in at 45.2 and Services no longer balances it out as it is also in contraction territory at 49.2.
“New business is weakening again for both manufacturing and services with export orders in particular being down sharply as the eurozone economy battles weak demand from abroad. Businesses also became gloomier about the outlook for the year ahead,” noted ING.
UK PMIs also missed expectations but have been less of a concern as they are close to 50(Services came in at exactly 50) and the UK economy has been more robust than the EU.
The euro dropped rapidly in response and was down –1.35% at 1.35 in the immediate aftermath. The fear is that the worsening figures may inspire the ECB to cut 50bpos in December rather than 25bps. ECB member Villeroy spoke earlier this week and made it clear the bank sees no chance of inflation bouncing back and this leaves the door open for aggressive cuts. At the October ECB meeting, President Christine Lagarde said everything was heading downwards – data, inflation, and rates.
The one hope for the euro is that this week’s PMIs are a one off and other data is more encouraging. As ING point out,
“Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf.”
GDP data could be key going forward and if it is better than expected, Friday’s EURUSD drop to 1.035 could mark a capitulation bottom.
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TAGS: Euro Dollar Forecasts
