Flash July PMIs: Markets Look for Growth

Economic growth indicators are taking over as major central banks are expected to raise rates in tandem, with leading metrics like PMIs likely to move currencies.

Key Points Moving the Market

• First look at August data could help markets determine if economic trends continue into the second half, justifying expected rate hikes
• ECB projected to raise first, followed by Fed and then BOE as they all face similar inflation pressure but differing economic growth
• Analysts expect cooling PMIs across the board, but if they manage to stay firmly in expansion, it would keep the rate outlook steady
• EURUSD at pivotal juncture as traders take into account differing timing for ECB and Fed hikes.

Eurozone Growth in Focus

On Friday, markets will have the first look at data for August with the release of flash PMIs, as growth rates become increasingly important for currency moves. Most major central banks are expected to hike by the end of the year, but how fast their respective economies are growing could determine which goes first. After underperforming at the start of the year, the Eurzone economy seems to be rebounding, and the upcoming PMI data could indicate if the trend continues into the second half. A similar story applies to the UK, after solid growth in June helped elevate economic growth, but economists are wary that the gains could be transitory on both sides of the Channel. By contrast, the US economy has shown some weakening signs, which could leave the ECB and BOE to hike ahead of the Fed, and support their respective currencies.

Markets are putting the odds of an ECB hike in September at 96%, compared to around 30% for both the Fed and BOE. However, that supposes the economy continues its current trends. Economists note that Eurozone growth has been more services-led compared to the more firmer industry-led growth in the US. If the upcoming PMIs indicate cooling in the services sector, it could derail the ECB's rate hike and weigh on the Euro. On the other hand, if services remains strong and manufacturing picks up, it could support the shared currency, particularly if the softening trend in US data continues.

What Markets Are Looking For

First up is French Flash August composite PMI, expected to stay barely in contraction at 49.9, but improving from 49.4 in July. Then German manufacturing PMI is projected to stay solidly in expansion, though tick down to 52.0 from 52.2 a month earlier. Eurozone composite flash PMI is projected to slide to 51.6 from 52.0 previously as the services sector cools faster than the manufacturing sector. However, staying firmly above 50 indicates expansion and is likely to reassrue markets. A full point move to the downside, however, could leave traders recalibrating when the ECB might hike. Across the channel, the UK Composite PMI is projected to remain essentially unchanged at 52.1, compared with 52.2 a month earlier. A significant beat or miss here could help sort out differing views on the BOE outlook, as a majority of economists see rates staying on hold while the market continues to price in a hike. In the afternoon, US composite PMI is projected to decline notably to 53.2 from 54.5 in July. Although still above European readings, markets might be more disconcerted by the magnitude of the drop. On the other hand, if the reading manages to stay near the prior month's, it could indicate that the US economy is doing better than feared, and the odds of a Fed hike in September might rise.

Could the EURUSD Take a Breather?

The Euro has gained against the dollar this month after a solid Q2 print and a weaker greenback. But with RSI above 60 for almost three weeks, its upward momentum could be waning as it enters a potential double top at 1.1600. A breakout would expose the May high as a major resistance level at 1.1800. If the double top holds, then it could find initial support towards the bottom of the VWAP at 1.1450, with a break down heading toward the July double bottom at 1.1350.

Source: SpreadEx | EURUSD, Daily Chart