As the euro searches for a bottom, business survey data out of the Eurozone this week could help the single currency put a floor under its recent declines. The flash PMIs from IHS Markit for May will be released on Thursday at 08:00 GMT, along with Germany’s Ifo business sentiment gauge due at the same time. However, even if the survey numbers manage to bolster the euro, dangers lie ahead as a rise in support for populist parties at the European Parliament election this week could increase political risks across the region.
Eurozone PMIs likely improved in May
There have been some tepid signs in recent weeks that the worst of the economic slowdown is over and growth is regaining upward momentum. The preliminary PMI readings are expected to provide further evidence of this on Thursday. Activity in services is forecast to improve slightly in May, with the PMI increasing 0.2 points to 53.0. However, the manufacturing sector likely continued to contract, though at a slower pace, with the PMI expected to increase from 47.9 to 48.1. The composite PMI, which combines both the services and manufacturing PMIs, is anticipated to rise to 51.7, barely recovering from the 5½-year low plumbed in January.
No dramatic change is expected from the German Ifo survey either. The Ifo’s current conditions index is forecast to rise slightly from 103.3 to 103.5 in May but the gloom over German business sentiment isn’t anticipated to be lifted just yet as the Ifo expectations index is projected to fall from 95.2 to 95.0. As a result, the overall business climate index is forecast to ease marginally to 99.1.
Euro within reach of April 22-month low
A disappointing set of survey reports would weigh on the euro as they would only underline the sluggish growth outlook that is preventing the European Central Bank from pushing ahead with rate hikes. Euro/dollar could slide as low as the 123.6% Fibonacci extension of the March upleg from 1.1174 to 1.1448, which lies at April’s 22-month low of 1.1110. Below this level, the 1.10 handle would become increasingly in focus as it’s the 161.8% Fibonacci extension.
On the other hand, an upbeat PMI assessment could provide the euro with some much-needed upside, and possibly lift it above immediate resistance around $1.1175. Clearing this hurdle would open the way for the 78.6% Fibonacci at $1.1233, which is just below the 50-day moving average.
Populist parties expected to make big gains at European elections
Aside from the all-important PMI indicators, politics will also be front and centre for traders this week. Voting for members of the European Parliament will take place between 23-26 May and populist parties are predicted to make big gains. The centre-right and centre-left parties are projected to lose their combined majority in Parliament. However, while Eurosceptic parties are expected to make big wins, it’s unlikely that any group or alliance will achieve a majority, possibly resulting in a fragmented Parliament.
The main outcome of this is it would weaken the European Union’s agenda on key issues such as reforming the union and closer integration. It would also give Italy’s populist government a stronger voice in its stand-off with the European Commission over the country’s excessive budget shortfall. A divided EU Parliament could also undermine the bloc’s united front in the Brexit negotiations with departing member, Britain, as well as against the United States in future trade talks.
But, in the immediate term, unless there’s a decisive victory for any political group, the euro is likely to see only a knee-jerk reaction to the vote results when markets open on Monday and a picture has emerged about the new political landscape in Europe.
