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Euro Hits Higher as Eurozone PMI Readings Surprise to the Upside and Draghi Gives No Clues on Policy

During early European hours, the euro pared almost half of yesterday’s losses against its US counterpart after preliminary Markit composite PMI readings out of the Eurozone indicated that business activity in the block continued strengthening in August, despite a pullback in the previous month. Before the data release, ECB president, Mario Draghi, did not comment on future monetary policy plans during his public appearance in Germany.

Following a disappointing performance in July, flash IHS Markit PMI figures out of Eurozone came in better than expected in August, after higher activity in the manufacturing sector offset weaker activity in the services industry. Manufacturing PMI rose unexpectedly by 0.8 points to 57.4 instead of declining by 0.3 points to 56.3 as analysts had projected. On the other hand, services PMI dropped to 54.9, while analysts expected the index to remain steady at July’s mark of 55.4. Overall, the IHS Markit composite PMI which summarizes surveys given to over 300 private manufacturing companies and 300 services companies, ticked up by 0.1 points to 55.8, exceeding the forecast of 55.5 and remaining close a multi-year high level of 56.8 reached during April-May.

Positive German and French PMI readings were also published along with the Eurozone data. Regarding the manufacturing sector, the German PMI jumped surprisingly to 59.4, while expectations were for the index to retreat to 57.7. The French one also came in above expectations at 55.8. Concerning the services PMI, the German index improved to 53.4 while the French index declined to 55.5 with projections being at 53.3 and 55.8 respectively.

Meanwhile, in Germany, ECB President Mario Draghi, avoided commenting on whether the ECB will tighten its monetary policy amid strengthening economic conditions across the Eurozone. Instead, Draghi made reference on how lower interest rates accompanied by quantitative easing has helped the block to recover from the global financial and Eurozone debt crises.

However, investors will closely watch Draghi’s comments at the Jackson Hole symposium on Friday in Wyoming for any clues on monetary policy tightening in the future, as it is widely expected that improving economic data in the Eurozone will prompt the ECB to withdraw stimulus soon. Note that, flash GDP growth in the area remained steady at a one-year high of 0.6% q/q in the second quarter of the year.

Looking at the reaction in the forex markets, the euro climbed immediately by 0.30% versus the greenback to $1.1791 before sliding to 1.1781. Euro/yen also increased by 0.30% to 129.02 and then eased back to 128.90, while euro/pound touched a 10 ½ -month high of 0.9213 (eight-year high, excluding pound’s short-lived flash crash in October 2016), supported by heightened uncertainties around Brexit.

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