EUR: Pessimism Reigns in Markets Amid Weak PMIs

EUR: Pessimism reigns

Yesterday's worrying release of flash PMIs for August certainly made their mark on markets. The ECB's trade-weighted euro fell around 0.5% and the two-year EUR/USD swap differential widened by a large 10bp on the day. At around 145bp in favour of the dollar, this differential is back to the widest levels seen since March and is a clean EUR/USD negative. The EUR/USD test of the 200-day moving average at 1.0800 yesterday looked fully justified and were it not for those US payroll revisions, EUR/USD would be trading much closer to 1.0800 this European morning.

We have not heard much from ECB speakers recently (President Christine Lagarde will speak late tomorrow), but markets are quickly losing confidence that the central bank will be able to squeeze in another rate hike before the drop in eurozone activity closes the door on the tightening cycle. This is certainly frustrating the case for EUR/USD to be making it quickly back above 1.10.

The clear near-term range for EUR/USD looks to be 1.0800-1.0930. Despite today's slightly better risk environment, we doubt investors will want to chase EUR/USD too much higher and unless there is a sharp spike higher in US initial jobless claims today, EUR/USD may well end up gravitating back towards 1.0800.