Euro retreats following gloomy PMIs

By Samuel Indyk

LONDON (Reuters) – The euro continued its retreat on Friday from a more-than-two-week high as disappointing activity data from France and Germany pushed the single currency lower, a day after the European Central Bank raised interest rates for the first time since 2011.

German business activity unexpectedly shrank in July while French manufacturing activity contracted and growth in services slowed, preliminary purchasing managers’ (PMI) surveys showed.

Analysts said the euro was struggling as the euro zone economy appeared to be heading towards a recession.

“The U.S. economy is slowing but Europe is slowing quicker. It’s the reason why the FX market continues to be underweight the euro,” said Viraj Patel, macro strategist at Vanda Research.

The euro had already edged lower as the ECB’s new tool to shield indebted states from soaring borrowing costs, announced on Thursday, failed to impress investors, with many worried about a lack of detail and conditions that could make it tough for the likes of Italy to use.

Analysts also said the removal of the ECB’s forward guidance on rates could make the central bank more data dependent.

“Maybe the ECB can eke out another hike in September but judging by the direction of travel for the European economy I don’t think they’ll be in any shape or form to be talking about rate hikes in December or early next year,” Patel added.

At 0828 GMT, the euro was down 0.8% to $1.0152, retreating further from Thursday’s knee-jerk peak of $1.0279 following the ECB’s hefty 50 basis point rate hike.

The dollar index – which measures the greenback against six major peers, with the euro the most heavily weighted – was last up 0.52% to 107.17, following a 0.34% slide on Thursday.

For the week, the index remains down 0.79%, the biggest decline since May 29 and its first losing week in four, as disappointing U.S. data throughout the weak dampened expectations of a large 100 basis point hike from the Federal Reserve next week.

Traders now put 83.7% odds on the Federal Open Market Committee raising rates by 75 basis points on July 27, with 16.3% probability of a full-point hike.

Elsewhere, sterling slid 0.4% to $1.1955, trimming its gain for the week to 0.72%, still the most since late May.

The dollar rebounded 0.2% to 137.60 yen with the Japanese currency on track for its first weekly gain against the greenback in eight weeks.

The risk-sensitive Australian dollar fell 0.2% to $0.69225 and the New Zealand dollar also slipped 0.2%, to $0.62395.

(Reporting by Samuel Indyk in London and Kevin Buckland in Tokyo; Editing by Susan Fenton)

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