Euro falls as dismal eurozone and German PMIs raise likelihood of ECB interest rate cut

Tom Tong24/Apr/2013Currency Updates

GBP

Economic data out of the U.K. remains weak, the bad news now appears to be priced into the pound and from a technical point of view, the currency’s fall against the dollar appears to have bottomed. Sterling has fallen more than 6 percent against the dollar and 5 percent against the euro this year amid a slew of weak economic data and concerns about the outlook for growth, as Sterling is this year’s second worst performing major currency.

The past week in particular has been hard for the U.K., with the International Monetary Fund criticizing the country for its austerity plans and Fitch Ratings on Friday becoming the second ratings agency to strip the U.K. of its triple-A rating.

However with weak economic data out of Europe and talk of an interest rate cut from the European Central Bank growing, there was room for sterling to recover some more ground, especially against the euro.

On more Domestic matters Scotlands inderpendance is starting to cause jitters with The Treasury releasing a report warning that an independent Scotland could endanger sterling, as the Scottish National party’s proposal for a currency union between an independent Scotland and the rest of the UK would be less stable than the Eurozone.

USD

Markets in the US suffered a brief but violent sell-off after a bogus tweet claimed there had been a terrorist attack on the White House. The Associated Press with a 1.9m twitter following printed the attack from its main account, underlining the growing influence of social media on investor sentiment and the risks associated with inaccurate information being distributed via social media. The tweet triggered a 0.9% decline in the S&P 500, reducing more than $130bn off the value of stocks on an otherwise positive day for equities.

Talk of the US losing momentum in the manufacturing sector; data released in the US experienced its slowest pace of growth in April for the last six months. Markit’s PMI index fell from 54.6 to 52, two points from the boundary between growth and contraction. Existing Home Sales declined to -.6% MoM for March from a previous of 0.2%.

The strong USD has hurt IBM’s Q1 results and Caterpillar lowered its full-year earning forecast on Monday. The relationship between price performance and domestic revenues over the last 12 months is seen across all 10 major groups in the S&P.

Markets will look towards the durable goods orders for March in the US due to be released this afternoon. Durable goods are sensitive to the US economic situation as they often require sizeable investments for items such as cars and appliances. Consensus shows a contraction of -2.8% down from a previous of 5.8% in February, a bearish outlook on the US.

EUR

The eurozone crisis is still intensifying, as massive central bank intervention becomes the norm. Shrinking economies has made it harder for countries to cut budget deficits and prevent debt burdens. The shared currency took a major dive yesterday, following weaker than expected manufacturing and services PMIs from the eurozone.

The eurozone PMIs revealed that there could be extended economic weakness in the region. Eurozone PMI manufacturing fell to 46.5 versus the forecast of 46.8, while the services PMI rose less than expected to 46.6.

France is in severe recession, with PMI manufacturing and services slightly improved, but both are still below the 50.0 figure that divides growth from contraction. The biggest disappointment, however, were the German PMIs. The country’s manufacturing PMI reading dropped to 47.9 while the services PMI weakened to 49.2. The German composite index fell back into contraction for the first time since Ocotober, confirming that even Germany has been badly contaminated by the chaos of the eurozone.

Another leading indicator will be coming your way today. At 8:00am GMT, the German IFO business climate survey will be published. It’s estimated to print a reading of 106.4, which is slightly down from last month’s 106.7. A falling reading is normally seen as negative for the domestic currency because it suggests that businesses are less optimistic (or more pessimistic) about their prospects for the next six months.

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Written by Tom Tong

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