The Euro rallied strongly in European trading against its major rivals, following German and Euro-zone purchasing manager reports that while showing weaker activity than in July, suggested that the Euro-zone economy was more resilient than had feared.

We previewed the Euro-zone PMI Release in our Fundamental Update: After Weak Euro-zone 2Q GDP, Flash August PMI's Can Set Tone for Euro

  • Germany's manufacturing PMI remained at 52.0, the same level as in July, and better than expectations of a drop to 50.9.
  • As a whole, Euro-zone manufacturing slid below the 50 level separating expansion from contraction, but the index's 49.7 reading was mainly in line with expectations. It had been 50.4 in July.
  • Germany's services PMI fell to 50.4, much weaker than the 52.1 expected, and the 52.9 level seen in July.
  • In the Euro-zone as a whole however, the services PMI eased 0.1 points in August to 51.5, compared to forecasts of a drop to 51.0.

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As a result of the release, the EUR/USD managed to break out of a small consolidation pattern from the Asian session, and rally through downward sloping resistance trendline, as wall as horizontal resistance at 1.4450.

How Does This Affect the Fundamental Bias of EUR:

While the reports showed the Euro-zone economy extending its slowest pace of activity in almost 2 years, it proved some of doom-and-gloom crowd wrong regarding the single economy. The composite index held at 51.1, while economists polled by Bloomberg had it dropping to 50. Therefore, this release helps alleviate the dark cloud of a possible recession in the Euro-zone, a EUR positive.

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However, as we saw from a secondary indicator - the ZEW Economic Sentiment - which fell sharply, growth is expected to be stagnant the rest of the year.

From Bloomberg: The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months in advance, plunged to minus 37.6 from minus 15.1 in July. That's the lowest since December 2008 and the biggest drop since July 2006. Economists expected a decline to minus 26, according to the median of 36 estimates in a Bloomberg News survey.

A four-week rout in equities has wiped more than $8 trillion off global stock values, with Germany's benchmark DAX index (DAX) plunging almost 25 percent, as investors fret that Europe won't be able to contain the debt crisis and prevent it from infecting the banking sector.

Even after the ZEW report knocked back the EUR, it became a chance for traders to scoop up the EUR at a cheaper price, as they had braced themselves for a negative number.

With the sovereign debt crisis still to be resolved, and economies across the continent imposing austerity measures, domestic demand is expected to be weak.

Therefore, while it did not happen in August, the negative headlines and drop to domestic demand expected by economist may still filter through into the data in September. Leading indicators like confidence and new orders are showing weakness, so the expectations is there is certainly scope for further deterioration.

In the short term this report provided relief for the EUR and as a result the EUR was bought up, but we have to be cautious heading forward, even into the end of the week, as risk sentiment can shift against higher yielders if Bernanke disappoints at his Jackson Hole speech.

Nick Nasad
Chief Market Analyst
FXTimes