Eurozone PMIs support faster normalisation by the ECB

This morning’s composite PMIs from the eurozone printed well above expectations, with a rise in services activity particularly fuelling the rebound. France, Germany and the eurozone all saw their services PMIs overshoot expectations by over 2pts and print well above the 50-level expansionary threshold.

Services continued to improve as the sector rebounded from the Omicron hit at the end of Q4 2021 and the start of 2022. However, production growth in manufacturing was much more subdued for all three regions, as the lingering impact from Russia-Ukraine and Covid-related lockdowns in China continue to disrupt supply. Still, the rebound in the services indices was enough for the composite figures to overshoot expectations. Despite the record drop in real wages due to multi-decade high inflation, consumers are still willing to spend some of their savings built up during the pandemic now that restrictions have eased.

Despite the overall positive data, the figures failed to prop up EURUSD given that market pricing for rate hikes by the European Central Bank has turned substantially more aggressive in recent trading sessions, limiting the scope for further euro upside based on soft data indicators.

At the moment, euro OIS markets are pricing in 95bps of interest rate hikes by the ECB for the next year, compared to 60bps last week. The shift occurred as several ECB members spoke out to media and discussed the possibility of lift-off in July. This had propped up the euro prior to the PMI release already, with EURUSD having broken above the 1.09 level on Thursday before hawkish Fed rhetoric supported a broader USD rally and saw the pair pare back gains. Even though markets didn’t react much to today’s data, we believe the PMIs do send a hawkish signal to the European Central Bank and should support their view of sped up normalisation. The only thing holding the ECB back from normalising at a faster pace is growth concerns at the moment, as inflation is already sitting at levels that would make any central bank uncomfortable. The fact that services activity has rebounded this sharply despite the drop in real wages signals the economy may be more resistant than the ECB thinks. If further data supports this view, more members are likely to follow the recent hawkish rhetoric.

Eurozone PMIs fail to excite euro traders with markets already pricing in over 90bps of ECB hikes

Authors: 

Ima Sammani, FX Market Analyst

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