Forex Market Reaction to European Manufacturing PMI’s

April 19, 2017
forex market

"The process by which banks create money is so simple that the mind is repelled" - John Kenneth Galbraith, economist (1975)

When the trading environment gets tough, one of the easiest things to do is to reassess your money management. Current price action in most of the major pairs clearly indicates that the Forex market is looking for a direction. Geopolitical tensions are extremely high at this point and that has made everyone relatively cautious.

Under such complex circumstances, it’s very hard to predict how the market may react if something dramatic happens. Given the overwhelming uncertainty surrounding the Korean peninsula, it’s better to be safe than sorry. Furthermore, the U.S. economy is also sending out mixed signals and already some of the FOMC members have toned down on their hawkish bias.

In addition, in Europe, while the economic outlook is strengthening, political uncertainties are growing. When it comes to euro, it’s rather clear that the Forex market participants are worried about the elections in France. Marie Le Pen has demonstrated her pessimistic views on the common currency as well as on the European Union. This means that for now, the economic data is more or less secondary as the market is looking for clarity.

Read Also: U.S. Inflation: Where to?

Manufacturing and Services PMI’s in Europe

Eurozone’s economy is currently growing at its fastest pace we’ve seen in the last six years. Fourteen consecutive quarters of growth is truly remarkable. In addition, the unemployment rate has finally broken below 10 percent and has managed to stay below it. Of course, there’s still plenty of room for improvement but nevertheless, we are seeing progress and that is what the euro area currently needs.

On the upcoming Friday we should see further confirmation that indeed, the economic outlook for the currency union is improving. German manufacturing PMI has been on a one-way trip to the upside since February 2016. Back then, the index stood at 50.5 and since then we’ve moved up all the way to 58.3 which is also the highest reading since May 2011. In the Forex market, leading indicators such as PMI’s are always important to follow as they reflect future demand.

The second largest economy in the euro area, France, is unfortunately not advancing at such high pace. French manufacturing PMI has been below the 50 level for most of the time since August 2011. Today the index stands at 53.3 which is the highest reading since June 2011. Given the fact that the PMI has been below the boom/bust line for the better part of the last six years, we need to see significantly higher figures there to cover the damage.

Services PMI’s are also looking promising in both countries. Once again, Germany leads the way as the PMI in question has been above the 50 level since June 2013 (currently 55.6). France, on the other hand, is showing a bit more optimism right now as there the PMI is close to 58 (57.5). However, again, there’s difference in stability of the growth momentum.

Elections in France Over the Weekend

As already mentioned above, when it comes to currency trading right now, then the economic data is firmly secondary market mover. The presidential election in France is the big elephant in the room and no one dares to predict the potential outcome. After all, everyone still remembers how the U.S. presidential election turned out.

Regarding the EURUSD, it’s hard to predict how the pair might react ahead or after the elections. However, the brokers are not taking any chances. Most of us probably have already received an email or text message from our brokers that the margin requirements are going to be higher starting from Friday afternoon.

Most likely, the reaction in EURUSD to a negative outcome is going to be more significant than to a positive outcome.  At this current moment, euro is pushing higher and is trading around 1.07 against the dollar. Rising euro is perhaps not the news Mr. Mario Draghi wants to hear but be aware of additional gains there as short-covering ahead of the weekend is very much possible.

Conclusion

Even though the European manufacturing and services PMI’s are about to be released on Friday, their impact to euro should be relatively limited. Forex market is not always data dependent and right now, there are bigger events to worry about. In general, it seems that in Europe, it’s going to be an election year. France, Germany and just hours ago, Theresa May, Prime Minister of the United Kingdom, announced that she will ask the British MP’s to support snap general elections in June this year.

Also, one shouldn’t forget that we are trading currency pairs in the forex market and not a single currency. Hence, keeping an eye on the developments in the U.S. goes without saying.

Capital Properties FX
April 18, 2017

Read Also: Inflation in Europe: Was Yesterday’s Data Good Enough?

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How AIG's Collapse Began a Global Run on the Banks, Porter Stansberry, October 4, 2008
The World's Central Banks - Living on Borrowed Time, Viable Opposition, July 1, 2013

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