Eurozone Contraction Fuels Currency Market Worries, Dollar Under Pressure

On December 15, today’s economic data paints a concerning picture of ongoing contraction in industrial activity across Europe. S&P Global’s industrial purchasing managers’ data reveals a persistent downturn, holding steady at 44.2 in the eurozone for December, matching November’s level, contrary to the expected 44.5. In addition, the services purchasing managers’ index in the eurozone records 48.1, marking its lowest level in two months.

In Germany, the industrial purchasing managers’ index contracts to 43.1 this month, albeit reaching its highest point in 7 months. Simultaneously, manufacturing purchasing managers’ index data for Britain contracts to 46.2, marking the lowest in two months.

On Thursday, the European Central Bank and the Bank of England decided to maintain unchanged interest rates, aligning their stance with the decision made by the US Federal Reserve on Wednesday.

Shifting our focus to the currency market, the Euro trims gains in Friday’s European session, trading around 1.0960 against the US Dollar, following a rejection at November’s high. This retreat comes as Eurozone business activity data disappoints, casting doubts on the European Central Bank’s hawkish message.

December’s Preliminary HCOB Services PMI falls to 48.1 from 48.7 in November, against expectations of a moderate improvement to 49. The data indicates a faster contraction in the Eurozone’s key services sector activity compared to the previous month. Similarly, the Manufacturing PMI remains unchanged at 44.2, contrary to the market’s anticipation of an improvement to 44.6. Any PMI reading below 50 signals contraction.

These figures underscore the weak contribution to GDP by both sectors, prompting questions about the central bank’s ability to sustain high interest rates for an extended period. This concern arises after ECB President Christine Lagarde’s commitment following Thursday’s monetary policy meeting.

Looking ahead, the US S&P Global PMIs and the NY Empire State Manufacturing Index are anticipated for the US economy later today. This data might exert negative pressure on the US Dollar, adding further complexity to the global currency market.