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THE TAKEAWAY: Manufacturing PMIs much weaker than expected -> Core countries hit by slowing demand from the European south -> Euro falls against US Dollar

Weak readings from the European manufacturing sector sparked a bout of Euro weakness today. The weighty German manufacturing purchasing managers’ index came in at 46.2 versus the expected 46.3. Beleaguered Italy was hit hardest, with the gauge coming in at 43.8 versus the expected 47.1. The French number fell to 46.9 from the expected and previous 47.3. A number below 50 indicates market contraction.

Euro_Plummets_after_Abysmal_European_Manufacturing_Data_Set_body_BOE.png, Euro Plummets after Abysmal European Manufacturing Data Set

Weakness in German manufacturing is of particular concern to many market participants, given Germany’s overall relative strength in the face of the current far-reaching crisis. Germany is also the Eurozone’s largest and most influential economic player. The German economy has thus far resisted recession as ultralow unemployment levels bolster consumer spending and offset a slump in international demand. New orders predictably wakened today’s number, with particularly weak demand from the European South.

Italy, meanwhile, remains beset by austerity measures imposed by the German-dominated European Union. The latest steps out of Rome are intended to reduce unsustainable Italian debt levels, but have also negatively affected consumer confidence.

The Euro-area composite PMI manufacturing also came in weaker than expected at 45.9 versus the expected and previous 46.0. The composite PMI gauges manufacturing sentiment across the 17-member Euro area. The number underscored the Eurozone’s deep-rooted growth issues, as the region’s leaders attempt to juggle lagging growth, burdensome sovereign debt, and inflation’s ever-increasing threat.

Euro_Plummets_after_Abysmal_European_Manufacturing_Data_Set_body_BOE_1.png, Euro Plummets after Abysmal European Manufacturing Data Set

Meanwhile, today’s weak reading is expected to further complicate the European Central Bank’s task as it struggles to guide the region to economic recovery. Rising energy costs continue to sap consumers’ purchasing power as economies descend into recession and demand drops. The ECB’s Governing Council in its most recent report mentioned a “moderate recovery” since the beginning of 2012, but warned that inflationary risks remain a factor in price action.

Euro_Plummets_after_Abysmal_European_Manufacturing_Data_Set_body_BOE_2.png, Euro Plummets after Abysmal European Manufacturing Data Set

The Euro sold off sharply against the US Dollar after today’s release, which coincided with a slight rise in German unemployment. The single currency traded into the 1.3170 area after staying above 1.3200 for the past few days. A break belowconsolidation levels around 1.3000 is seen accelerating losses, while only back above 1.3500 would negate our long-term bearish outlook.

Euro_Plummets_after_Abysmal_European_Manufacturing_Data_Set_body_BOE.jpg, Euro Plummets after Abysmal European Manufacturing Data Set

The Euro also weakened against the Japanese Yen as the weak data encouraged flows into the safe haven currency.