Summary:

• European PMI slipped to the lowest level in 6 months
• While manufacturing remains in a good condition, services sector cooled down
• However, the data shouldn’t change the ECB’s view on the economy

Growth in the euro-region economy started the third quarter at the weakest pace in six months as manufacturing cooled. A composite Purchasing Managers’ Index
fell to 55.8 from 56.3 in June, IHS Markit said on Monday. The figures indicate that gross domestic product is expanding at a 0.6 percent quarterly pace, compared with 0.7 percent in the second three months of the year.

While growth appears to be firming, prices aren’t picking up fast enough to get to the ECB’s target without help from record low interest rates and continued bond buying. “The eurozone’s recent growth spurt lost momentum for a second month, but still remained
impressive,” said Chris Williamson, chief business economist at IHS Markit. It “adds to the belief that ECB policy makers are in no rush to taper.” Increases in manufacturing costs are starting to slow, with the rise in input costs the lowest since November, Monday’s report showed. Growth in new orders and employment is still strong.

European PMI gave up part of its gains, but the recovery remains solid. source: Bloomberg

What’s more, also regional data points to a slowdown in growth. German private sector growth was the weakest in six months in July as both services and manufacturing lost steam. A composite Purchasing Managers’ Index fell to 55.1 from 56.4 in June, the lowest since January and below economists’ expectations, IHS Markit said on Monday. An index of manufacturing slipped to the worst in three months. However, the reading is still well above the 50 mark that separates expansion from contraction. As for France, French manufacturing gained momentum with PMI rising to 55.4 (from 54.8 previously) while services PMI slipped to 55.9 from 56.9. 

What does it mean for the euro? It shouldn’t change a thing. Growth remains solid and the trend is positive. Expansion continues, which means that the ECB could go on with its tapering plan. The latter will depend mainly on inflation developments, so it is inflation data that will be crucial for the currency. EURUSD remains above 1.1600 and is close to a crucial resistance above 1.17. A break above would mean that a test of 1.20 could be on the cards.

EURUSD remains close to the crucial support. A break above 1.1700 would open a way towards 1.20.