Euro loses ground to dollar
The euro came under renewed pressure on Friday and lost a little ground to the dollar. Political uncertainty in the Euro Area, in particular the upcoming French elections, have pushed down on the single currency, which dropped below $1.07 for a time and is trading around that level this morning. With the French elections first round next weekend, and second round a week after, we could see more volatility in the days ahead. Against sterling, the euro has been a bit more stable and continues to trade around 84.6p. That meant the pound has also eased back against the dollar and is now trading at $1.2650 this morning.
There wasn’t much movement overall in Government bond yields during last week. US 10-year yields were up just 3bps for the week to 4.25%, UK 10-year yields were also up 3bps to 4.08% with German 10-year yields up 5bps to 2.4%. French Government bonds yields have been volatile since the elections were called two weeks ago but seem to have settled around 3.2% for now.
Euro area flash PMI’s showed an easing of activity in the zone in June. The composite index dropped to 50.8 this month, just above the 50 expansion/contraction line, from 52.2 in May. That was a fourth month of expansion but the slowdown in pace was unexpected. The Euro Area economy is in a nascent recovery, with GDP expanding by 0.3% in Q1 following a 0.1% dip in Q4 of last year, but this data suggests some of the momentum is waning. The easing in the index in June was largely due to a slowdown in manufacturing which slipped further back into contractionary territory to 45.6, from 47.3, with a low print in Germany, 43.4 down from 45.4, weighing down activity. Industry in the EU’s biggest economy has been suffering a prolonged slowdown and while the reading is up from the low of 38.8 last summer, it’s now two years since the German manufacturing PMI pointed to any expansion in activity in the sector. The survey also pointed to slower activity in services in the Euro Area, 52.6 from 53.2, though it managed to stay in expansionary territory.
The early UK PMI readings for June also point to an easing pace of expansion. The composite fell to 51.7 this month from 53.0 in May. Unlike the Euro Area, services was the weak point in the UK in June with the index coming back to 51.2 from 52.9, while manufacturing was pretty much unchanged, ticking up slightly to 51.4. The survey indicated that costs are still a concern for businesses with input and output prices indices rising. Services inflation is a key concern for the Bank of England with wages remaining the key driver of costs in the sector. The MPC minutes last week indicated that the Committee may be moving towards a cut in the next few meetings but data such as this will remind members that businesses, particularly in the services sector, are still seeing price pressures.
In the US, the PMIs remained in expansionary territory with the composite picking up marginally to 54.6 in June from 54.5 in May. There was small pickups in both services, to 55.1 from 54.8, and manufacturing, 51.7 from 51.3. The services PMI rose to indicate that the sector expanded at the fastest pace in over two years. Current demand is picking up in both manufacturing and services with the report also showing prices pressures easing and the outlook improving, with the index for future activity rising this month in the services sector. Optimism was more subdued in the manufacturing sector with businesses concerned about future demand prospects and also potential changes in policy post the election in November.
Economic data due today includes the IFO index in Germany while a number of ECB and Fed members are due to speak.