Euro recovers despite soft business activity data

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25 July 2018

thomasdodds

The Euro recovered from a four day low against the US Dollar on Tuesday, rising back above the 1.17 level despite another set of fairly disappointing business activity PMIs out of the Eurozone.

Y
esterday’s PMIs suggest that the Eurozone got off to another fairly rocky start to the third quarter of the year, with the currency bloc’s dominant services sector putting in a particularly soft performance. The index slipped to 54.4 from June’s 55.2, its second lowest print in a year and a half. This also dragged the key composite index to a relatively lowly 54.3, down on the 54.8 pencilled in by economists.

Following a stellar 2017, this underwhelming data is another clear sign that activity in the Euro-area softened so far this year. Simmering trade tensions with the US and uncertainty over Brexit will far from help matters in the second half of the year. Next up will be this morning’s confidence indexes from IFO. Amid the recent uncertainty over US protectionist policies and Brexit, we think that there is a decent chance these could also surprise to the downside. Investors will also be eyeing Thursday’s ECB meeting.

Theresa May assumes control over Brexit talks

Sterling rose back to a more than one week high against the broadly weaker greenback this morning, with investors largely taking a positive view over Theresa May’s decision to assume personal charge of the Brexit negotiations. Brexit Secretary, Dominic Raab, who was only brought in to replace David Davis a few weeks ago, will now deputise for May, when required. This also involves a downgrading of the Brexit department’s remit, which will now be passed directly to Downing Street. With the October deadline on negotiations fast approaching, the Prime Minister’s is obviously keen to get a deal agreed as soon as possible.

With only second tier economic data releases out of the UK today, the Pound will likely be driven largely by Brexit developments.

Dollar rally loses steam, Lira falls after central bank holds rates

The recent rally in the US Dollar fell flat again on Tuesday. The currency edged lower off the back of mostly soft macroeconomic news, with the housing price index and composite PMI both falling short of consensus. New home sales data out of the US this morning is unlikely to rock the boat. Friday’s preliminary GDP numbers will be of far more significant to the US Dollar.

The most newsworthy story out of foreign exchange markets yesterday may, however, be the decision of the Central Bank of Turkey (CBRT) to leave interest rates unchanged, after investors anticipated another hike to protect the Lira. This caused the currency to be comfortably the worst performer for the day, slumping by over two percent to another fresh record low.