In fact, economic activity has already slowed down according to the latest Purchasing Managers’ Indices from Germany and especially France, where Covid-19 cases have risen sharply since July. Investors will now be cautious about buying the euro as the weakness in data and the rising Covid-19 cases both raise questions about whether more stimulus will be needed. The German services sector is on the brink of contraction again while French manufacturing activity already shrunk in August, according to the flash PMI data released by Markit this morning:
- French services PMI plunged to 51. From 57.3, while its manufacturing PMI dropped to 49.0 from 52.0, with both measures easily disappointing expectations
- German services PMI dropped nearly by five whole points to 50.8 from 55.6 previously, while its manufacturing PMI actually beat expectations, rising to 53.0 from 52.1 in the previous month
Aggregate PMI data from the euro area will be released at the top of the hour, but with the single currency bloc’s biggest economies already reporting weak numbers, don’t expect to see any positive surprises.
EUR/GBP drops as growth concerns trumps Brexit risks
The other key issue facing the eurozone will be the subject of Brexit. So far, however, there has been little market reaction to this, despite growing signs a deal is at risk of falling through, with very little progress being made on key topics. This may come back to hurt the euro and more so the pound in the weeks and months ahead, but for now the latter is in ascendancy relative to the former – and this is all to do with the fact virus cases are spiking again across parts of the Eurozone.
With the EUR/GBP creating a bearish engulfing candle on the daily on Thursday, and holding below the bearish trend line, the path of least resistance is now to the downside. It will remain that way until price forms a key bullish reversal pattern at lower levels, or until it takes out its bearish trend line and resistance around 0.9070.
