Euro-Dollar Analysts See 1.25+ As PMIs Signal Return to Growth


– EUR / USD on track for 1.25 in summer
– Key industries return to growth in May
– Led by France, helped by Germany et al
– Fire the starting pistol at the recovery run Q2

Image © European Central Bank

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Euro-dollar exchange rate appeared higher from the 1.22 level recently recovered on Friday after IHS Markit PMI surveys suggested that major mainland industries resumed growth in May, effectively firing the starting gun on an economic recovery some analysts see taking the single currency to 1.25 this summer.

The single European currency had already recovered 1.22 before publication, its highest level since late February, but was trying to deviate from the level after surveys of manufacturing and services sectors surprised on the rise for May .

Indices measuring an agglomeration of indicators suggest that the German service sector has returned to growth this month, while manufacturing activity has slowed, although activity and output in the latter industry have declined. already reached record levels in recent months.

But it was the French industry that surprised the most and contributed the lion’s share to the rise in the PMI indices for the euro area as a whole, with the French services PMI reaching one of its highest levels since years while manufacturers benefited from both an easing of restrictions on home activity as well as recoveries elsewhere.

“These figures are robust, although a little less stellar than in France,” said Claus Vistesen, chief eurozone economist at Macroeconomics of the Pantheon, referring to German PMIs. “The chart shows that GDP growth in France rebounded in Q1, and judging by PMIs, and the trend of improving virus cases, the economy will build on this gain in Q2.”


Above: Pantheon Macroeconomics chart showing French PMI surveys alongside real GDP growth.

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The French manufacturing PMI fell from 58.9 to 59.2 this month – a record high – while the services sector may have returned to growth, with the PMI comfortably rising above the 50 level, which shows the difference between the expansion and contraction of the industry for the first time since July of last year. .

For the euro area as a whole, recoveries in the manufacturing industry stabilized this month, with the IHS PMI falling from a record high of 62.9 to 62.8, although, as in France and Germany, the continent’s service sector appeared on the right track for a return to growth.

The services PMI fell from 50.5 last month to 55.1 in May, coinciding with a temporary easing of activity restrictions in some of the bloc’s major economies and with economists’ hopes that the current quarter will bring about a sustainable return to growth.

“Supported by aggressive monetary stimulus, an adequate fiscal response and strong global demand, Europe is on track for a solid rebound from the Covid-19 recession. As the winter wave of the pandemic recedes, the gradual easing of restrictions underpins a rapid recovery in the services sector in addition to exceptional growth in the manufacturing sector, ”says Holger Schmieding, chief economist at Berenberg.

The Euro-dollar rate attempted to move away from 1.22 as the U.S. dollar index moved towards 2021 lows following Friday’s release, drawing a line below the earlier weakness seen when the dollar surged after the release of April minutes. Federal Reserve Political meeting (Fed) Wednesday.

EUR / USD Chart May 22

Above: Euro-dollar rate displayed at hourly intervals next to the US dollar index.

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“Last week we moved our EURUSD range for the remainder of Q2 from 1.1950 to 1.2350. As it is, a top level test will appear very soon. In order for our range to hold in the absence of a change in direction from the Fed, we would likely need to see 5-year and 5-year Eurozone inflation expectations peak before the usual 1.70% levels. in 2017-2018 ”, says Shahab Jalinoos, Head of FX Strategy at Swiss credit.

The dollar surged and the euro and other currencies fell when minutes from the April Fed meeting suggested that at least some U.S. rate regulators believed it might be appropriate for a given time in the coming months to start a discussion about when could be the best. It’s time to start winding up the bank’s $ 120 billion-per-month quantitative easing program.

That would mean higher U.S. bond yields, which could make the dollar more attractive, especially in light of Washington’s plans to spend trillions more over the next few years on infrastructure and other initiatives in addition to pandemic-related expenses.

But with the brief Fed-induced foray this week higher in the charts, it was European government bond yields and the euro that caught the attention of investors after hopes of a recovery were seen dragging back yields on German government borrowing towards zero and levels never seen since. early 2019.

“Unlike Treasury bills, the euro has shown greater sensitivity to movements in European rates. There is a strong non-linearity in the relationship between currency and interest rate differentials, with the euro becoming very responsive to bund yields when they cross zero, ”says George Saravelos, Head of Currency Research in German Bank, which predicts a Euro-Dollar rally to 1.25 by the end of September.

“Positive bund yields and a potential ECB collapse present asymmetric risks to the euro and will further accentuate monetary policy divergence from a delayed Fed tap,” he said.

EUR to USD yields

Above: Euro-dollar rate displayed at daily intervals with US and German 10-year bond yields.


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