Comment by Ranko Berich, Monex Europe
Eurozone preliminary readings for June’s Purchasing Managers’ Indices were in the spotlight this morning as they show a glimpse of what the start of economic recovery may look like in the eurozone as many countries in the region have gradually lifted lockdown restrictions this month. The euro found much support in the releases and continued rallying throughout the morning reaching a 5-day high against the dollar. French services, composite and manufacturing PMIs all printed above the 50.0 mark which indicates the first signs of expansion in the French economy since the pandemic struck, although the expansion is taking place from very low levels of economic activity. German PMIs printed slightly lower with a composite of 45.8, still indicating economic contraction, but a significant improvement from last month and slightly above the forecasted median. The eurozone composite PMI printed at 47.5 from 31.9 in May, while manufacturing and services printed at 46.9 and 47.3 respectively, all overshooting consensus. With the rest of the day being empty on the eurozone data front, PMI releases from the US in the afternoon will be key in further price action of the euro.
After falling against most of its G10 peers yesterday on hopes of recovery, the dollar had a bumpy ride this morning and whipsawed back and forth following comments from US trade adviser Peter Navarro. Navarro sent stocks tumbling after telling Fox News the trade deal “is over'' when asked about the agreement but later mentioned his comments were “wildly taken out of context”, while US President Donald Trump confirmed in a tweet that the US-China trade deal still is “fully intact”. Navarro’s reassuring comments had the dollar and stock markets reverse most of its earlier reaction straight away, while crude oil prices pared their decline from a three-month high after markets recuperated from the US-China trade confusion. The trade agreement was not the only viral topic in the US overnight as Donald Trump introduced immigration restrictions to help Americans that were hit by the economic downturn of the corona crisis. He stated that “we have a moral duty to create an immigration system that protects the lives and jobs of our citizens'', but the move has been criticised by several businesses as it would be damaging to the US economy. Trump said the restrictions would apply until the end of this year but may be extended if necessary. Today’s focus is turned to the Purchasing Managers’ Index readings that are scheduled for release.
Sterling managed a sustained rally yesterday against the US dollar and the euro, and held on to most of its gains overnight. A number of disparate stories this morning have some relevance for sterling, most notably reports that Boris Johnson will announce a reduction in Britain’s two-meter social distancing rule today, and announce the re-opening of venues and businesses in early July. Japan has reportedly given the UK a six-week deadline to reach a trade deal, with Tokyo’s negotiator arguing that both sides need to “limit their ambitions” to secure a timely deal - suggesting that agricultural export quotas for the UK may be hard to achieve. This morning’s main data release for the UK were flash Purchasing Managers’ Indices for the month of June. Better-than-expected releases from France earlier in the morning already signalled significant potential for an upside surprise in the releases, however, as a diffusion index PMIs track the change in business conditions, as opposed to their level. This means that a positive reading of 50 or above means that business conditions are improving - but in this instance, they are doing so from a very low base given very large contractions in April and May. The manufacturing PMI showed a slight improvement in economic conditions and printed just above 50 while the services and composite PMIs remained in contractionary territory at 47.0 and 47.6 respectively. The uptick in the soft survey data saw sterling fall from its highs but remain in positive territory.