Morning Brief – Sagging

Tue 24 Sep 2019



Of the $6.6tn daily foreign exchange market, trading across the two leviathans, EUR and USD, takes the lion’s share. In normal times then, the sheer weight of demand and supply behind both of these two major currencies makes the EURUSD pair relatively flat. However, when presented with a big enough reason, the value of the Euro’s immovable object versus the US Dollar’s unstoppable force does move. Yesterday presented one of these opportunities which saw the Euro lose 0.4% of its value against the Dollar. 


Soft data, those data relying upon sentiment and human interpretation rather than economic facts, is widely regarded because it is a fast-moving barometer of any economy. Whilst less accurate and more volatile than so-called ‘hard data’ observations of things like consumer confidence are useful in generating a more up to date impression of an economy than, for example, GDP growth with its statistical lags and complications. Soft data called the Purchasing Managers’ Index was released yesterday first in Germany and France and then for the Eurozone as a whole. Split into Manufacturing, Services and Composite, the Index recorded lower than previous readings and below consensus forecasts across the board in France, Germany and the Eurozone: three-dimensional cricket; three-for-three-for-three!


Sure, the Eurozone economy has been waning for a long time but it’s serious when the reserved and cautious ECB President Mario Draghi warns the European Parliament that geopolitical risks could cause the Eurozone to endure a ‘prolonged sag’. What was of particular concern is the 49.1 (versus 51.5 consensus forecast and 51.7 previous) observation in Germany’s composite PMI. Due to the statistical composition of the Index, a sub-50 reading signals expectations of economic contraction. Unsurprisingly, a surprise downside reading that crosses the momentum definition from expansion to contraction caused havoc within the single currency yesterday.


Bond yields continued to drive further into negative territory in a bid for safety within Europe. With talk of fiscal reform underway in Europe and an incoming President of the ECB, it will be important for the Eurozone economy to prove it can manage the change and deliver inflation again. Otherwise, it’s further down the rabbit hole for the Euro. Today the Supreme Court in the United Kingdom is expected to deliver its verdict on the prorogation of Parliament in yet another development in the Brexit saga.




Discussion and Analysis by Charles Porter

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