Euro drops to 7-week low, will PMIs surprise?

• Eurozone consumer confidence unchanged at -17
• Eurozone services and manufacturing PMIs to be released on Tuesday

The euro is trading quietly at the start of the week, just above the 1.08 line. EUR/USD stabilized on Friday, after a 3-day skid which saw the euro drop as low as 1.0760, its lowest level since March 28th.

Today features a very light data calendar, with only one release in Europe and none out of the US. Eurozone consumer confidence remains weak and was unchanged at -17 in May.

Eurozone PMIs reflect divergence in services and manufacturing

The eurozone releases services and manufacturing PMIs on Tuesday. These releases are indicative of the strength of these sectors. Since the end of Covid, we’ve seen a strong recovery in services while manufacturing has struggled. How bad have things been? German and eurozone manufacturing PMIs have reeled off readings below 50.0, which points to contraction, for 10 straight months. Global demand has been weak as the war in Ukraine and the cost-of-living crisis have hampered manufacturing. Services has fared much better, has business activity has recovered with the lifting of Covid restrictions.

To be fair, the divergence between services and manufacturing is not restricted to Europe; the US and UK have experienced the same trend, which could be repeated in PMI releases on Tuesday.

The ECB meets next on June 15^th and there is still uncertainty as to what the ECB has planned. The current tightening cycle seems close to ending and the markets have priced in another one or two hikes. Inflation remains high at 7.0% and core inflation at 5.6%, the ECB may have to deliver an oversize hike or two as inflation is much higher than the 2% target.

Fed Chair Jerome Powell said on Friday that the banking sector turmoil could mean that the Fed will not have to raise rates “as much as it would have otherwise”. Powell reiterated that inflation remained too high and future rate decisions would be data-dependent.

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EUR/USD Technical

• EUR/USD faces resistance at 1.0887 and 1.0969
• 1.0824 and 1.0742 are providing support

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