European Manufacturing PMIs Expected To Show Less Optimism

Tomorrow is the first of the month and the day arrives with a treasure trove of data from Europe.

Given the importance of the figures’ release, we can expect some extra volatility in the pound and euro pairs. Lately, both currencies have been relatively stronger in comparison to the softer dollar. We might get some data though that could change that situation.

One of the most important figures come from the Purchasing Managers Index surveys. Businesses manage their inventories with a few months of anticipation, so the data would represent how major firms see the economic situation evolve in a few months.

This is particularly relevant now in the context of covid. In the next two or three months is when we may see another surge of covid cases due to environmental factors and potentially a new vaccine alluding to the delta variant.

So, it’s important to know whether businesses are expecting another round of lockdowns or other forms of economic restrictions.

Understanding the underlying issues

Purchasing managers are the most sensitive to price changes.

Although Europe is not facing the same inflation problems as other countries at the moment, it doesn’t mean that the euro is immune from any impact. If prices increase among the eurozone’s main trade partners, but the euro does not adjust to reflect it, then inflation could pass on to the shared economy.

Most recently, the ECB has insisted they have more room to keep economic support going for longer than other central banks. If businesses are holding back purchasing due to a fear of a deteriorating economy, then the central bank might be on an easing track for longer.

However, if businesses are front-loading purchases concerned about inflation trends, then regulators might reassess their policy outlook. Particularly after both German and French CPI have come in above expectations in the latest releases.

What to look out for

The first data that could move the market is the German Retail Sales. Economists expect them to drop to -0.9% compared to +4.2% in the prior month. That implies an annual change of 3.7% compared to 6.2% a month earlier.

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