The latest PMI readings show improved growth in European economies, but unless ECB President Mario Draghi upgrades the region’s economic outlook, further EURUSD gains will be harder to come by.
The US dollar (USD) was slightly bid against in early-European trade today ahead of the European Central Bank (ECB) and Bank of England (BoE) meetings, but overall, the markets remained quiet as traders awaited the two key events of the day.
On the economic front, the data out of Asia provided a small boost to risk appetite when the official Chinese PMI results showed a surprising pick-up in activity, to 50.3 from 49.8 the prior period.
This PMI data contrasted sharply with the HSBC PMI figures, which fell to 47.7, but some analysts chalked up the difference to seasonal factors. The HSBC readings were taken earlier in the month when the turmoil in Chinese interbank markets was weighing on sentiment. Since then, conditions in the interbank market have improved, and that may have helped the official numbers.
2 Positive Signs for the European Economy
In Europe, the PMI readings were also better than forecast, with the final PMI reading coming in at 50.3 versus 50.1 expected.
Nonetheless, EURUSD slid lower for most of the overnight session, hitting a low of 1.3226 as traders remained wary ahead of the ECB meeting later today. While the market expects nothing new from ECB President Mario Draghi and company, traders will be keen to see if the ECB upgrades the region’s economic assessment given the improvements in recent data.
In the UK, the PMI manufacturing report was much better than expected, rising to 54.6 from 52.8 forecast. It’s clear that the pick-up in UK economic activity is gaining pace.
The GBPUSD pair spiked to 1.5200 on the news, but stalled at those levels as traders once again remained cautious ahead of today’s BoE meeting.
Few participants expect any fresh news from the BoE, and if the central bank keeps both interest rates and quantitative easing (QE) targets the same, sterling could see a relief rally after several days of pre-event-risk selling.
Today’s Primary EUR/USD Catalyst
In North America today, the ISM manufacturing data is on the economic calendar, but unless it provides a massive surprise, it’s unlikely to have much of an impact on the market.
Given yesterday's strong ADP employment and Q2 GDP reports, and the decent Chicago PMI data, the market is primed for moderately positive US manufacturing data. From there, traders will anxiously await Friday's all-important non-farm payroll (NFP) results for further confirmation of steady US growth.
Today’s trading, therefore, is likely to be driven by Draghi's remarks. The euro (EUR) has been surprisingly resilient for the past several weeks, but with EURUSD now approaching the key swing highs near the 1.3400 level, further upside may be harder to come by unless Draghi becomes considerably more upbeat about the Eurozone’s prospects in the second half of the year.
By Boris Schlossberg of BK Asset Management
