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01/10/2014: Slowdown in Europe just adds to the list of reasons to sell the euro


In recent monthly press conferences of the ECB, Mario Draghi has consistently been urging governments of the Eurozone to help with the recovery, noting that monetary policy alone could not be successful in pulling the region out of its economic malaise of low growth and anchored inflation. He has been calling for fiscal and structural assistance. Whatever the governments are doing to try and promote growth, it does not seem to be working. At least not according to the Eurozone PMI which continues to fall. The drop in the final September manufacturing PMI to 50.3 was worse than expected and lower than the 50.7 reading for August.

The main culprit was Germany which fell below 50 and into contraction mode for the first time in 15 months with a reading of 49.9. Although France improved to 48.8 (as expected) this means that the Eurozone’s two largest economies are in contraction. The mitigating factors are that Italy jumped back into expansion on its PMI and Spain was also ahead of expectation.

The other problem for Europe is that the manufacturing PMI for the UK is also dropping at a sharp rate. Although the UK still has a reading in expansion territory at 51.6, the decline is worse than the market is factoring in. As can be seen in the chart below the Eurozone manufacturing PMI (orange) and the UK manufacturing PMI (purple) are both strongly correlated, with the EU the UK’s largest trading market. Could this have implications for UK growth figures? With around three quarters of the UK economy service sector based, the Services PMI (which is holding up strongly) is a much better indication of growth, but the dip in the manufacturing PMI is still concerning.

EZ v GB PMI

However, the US still strongly expanding (the ISM is released this afternoon at 15:00BST and is forecast to drop slightly to 58.5). With the US ISM data expected to be significantly sharply better than both the UK and Eurozone PMIs this does not bode well for the euro or sterling. Both the euro and sterling dropped sharply against the dollar this morning after their respective weak PMI announcements.

GBP/USD has slightly rebounded, but the $1.6260 support will remain under threat. A breach would open the key low at $1.6050. Further weakness on EUR/USD is also expected, with a move towards the $1.2500 liekly in the coming days, whilst the old support turns new resistance at $1.2660.

In the European indices, there is still a disparity between the performances of the DAX and the FTSE 100. The DAX Xetra has formed support in the past couple of days, as reports of the ECB’s ABS purchase programme suggest a targeting of peripheral markets such as Greece and Cyprus. Nonetheless, the FTSE 100 remains under pressure as it continues to fall towards the next key support at 6529.

The gold price is also struggling with the strength of the dollar once more today. Fluctuating in a range of just over $5 (which is very tight compared to recent days) the pressure remains to the downside and for a test of the $1200 level. I still expect further weakness towards $1184.50 with rallies seen as a chance to sell. The latest reaction highs are $1219.46 and $1223.50.


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