EUR Under Pressure as July PMIs Signal Economic Contraction

EUR: July PMIs rain on the parade

As our colleague, Bert Colijn, wrote yesterday, the worsening eurozone July PMI figures point more towards contraction than stagnation in the European economy. That is something our European macro team highlights in their ECB commentary – namely that the ECB is just too optimistic in its growth forecasts. A reality check for those forecasts could undermine the ECB hawks and indeed the PMI data triggered an independent 0.4% sell-off in the trade-weighted euro yesterday.

Even though yesterday's break below 1.1100 in EUR/USD was a euro, not a dollar-led move, we still see some downside risks to EUR/USD from the dollar side later this week. Expect support at 1.1050 to remain under pressure heading into tomorrow's FOMC meeting and a break under 1.10 would of course undo the positive momentum witnessed earlier this month. It is possible we see a very narrow range in EUR/USD today, something like 1.1050-1.1100, where the pro-growth China news may be the only factor holding EUR/USD above 1.1050. 

Bigger picture, we may have to wait until September for the more sustainable upside breakout in EUR/USD, when the Fed will have sufficient evidence of disinflation to formally acknowledge it in an FOMC statement.

Also, look out for the German IFO today – presumably as soft as yesterday's flash July PMI releases.