New Data Disaster Fuels ECB Rate-Cut Rumors
“Horrid” German PMI data drove the EURUSD below 1.30 and further fueled speculation about a rate cut at the next ECB meeting. Meanwhile, slowing Chinese data proves the slowdown is affecting Asia as well.
The EURUSD broke below the psychologically important 1.3000 level in the wake of much-weaker-than-expected German PMI data and renewed speculation of a possible rate cut at the upcoming EuropeanCentral Bank (ECB) meeting in May.
Overall, it was a clear risk-off night in FX, as disappointing Chinese PMI data pushed both the Australian dollar (AUD) and USDJPY lower, while GBPUSD was pushed through the 1.5200 figure on larger-than-expected UK public sector net borrowing.
The German PMI figures were horrid, with the service sector slipping into contractionary territory, while the manufacturing sector sunk deeper below the 50 boom/bust line. German PMI services declined to 49.2 from 51.1 expected and 50.9 the period prior.
This was the first time that the services sector dipped below 50 since October 2012, indicating that the weakness in the Eurozone in general is finally seeping into the region's largest economy. Manufacturing dropped to 47.9 from 49.0 expected.
The weakening German PMI data casts doubt on any possible recovery in Q2 of this year and suggests that growth may be negative for two quarters in a row. The news also revived talk of a possible ECB rate hike, and given the deteriorating fundamentals in the region, the prospect of such a move has certainly increased. Eurozone policymakers clearly need some stimulus to revive the moribund economies of Europe, and a rate cut would be the quickest and least-expensive policy course.
Credit conditions in the Eurozone remain constrained, while price pressures are non-existent. Although a rate cut is unlikely to offer quick stimulus as the transmission mechanism in Europe remains broken, it will drive the EURUSD lower, thus helping the troubled export sector.
One thing is clear: Europe has reached the limits of its austerity policies, and even Germany is now suffering the consequences of its actions. Therefore, a more accommodative posture will be necessary if growth is to revive in the second half of this year.
Chinese Data Confirms a Global Slowdown
Meanwhile, the disappointing HSBC Chinese PMI data, which printed at 50.5 versus 51.4 forecast, is signaling that Asia is slowing as well. The AUDUSD dropped to 1.0220 in the aftermath of the release, but the pair continues to hover above the 1.0200 support level.
Whether it can hold that figure will depend on North American flows. If US equities sell off in response to the overnight news, and if the US flash PMI readings confirm further slowdown in activity, the AUDUSD could test the 1.0200 level as the day progresses.
All of this risk-off price action has certainly taken a toll on USDJPY, which broke below 99.00 and remains near the 98.50 level in mid-morning European trade. The pair has failed to breach the 100.00 mark yet again and may have set a near-term top for the time being.
Despite the continued efforts by the Japanese authorities to weaken the yen, the growing concerns over global economic slowdown are capping the move in the pair for now.
By Boris Schlossberg of BK Asset Management