Manufacturing activity in the euro area rose to the highest level since 2011, as European factories increased demand for labour to absorb the growing number of orders. The Purchasing Managers’ Index from IHS Markit rose to 57.4 points in June against 57.0 in May, with the economic recovery affecting almost all regions, from Germany to stagnating Greece. In the latter, positive dynamics are observed for the first time since August of last year, convincingly proving the region-wide character of economic growth.
Upbeat reports are of utmost importance for investors to base their long positions on the euro. After fairly positive comments from the ECB President Mario Draghi at the ECB’s forum last week, the consumer price inflation figures exceeded estimates and allowed for a surge in the euro. The growing demand in the labour market continues to drive unemployment to an 8-year low. Meanwhile, the growth of retail sales in Germany reached 4.8% in May, compared to the same period last year.
The forex market draws a rather deceptive picture of the euro. The common currency fell against its major rival – the US dollar – by half a percent on Monday, due to Janet Yellen’s comments predicting no crisis for the US in the near future. The EURUSD pair might see a “fight of bullish sentiments,” but given the two rate hikes this year and the difficulties in the domestic political arena, the Fed’s mood is much more likely to deteriorate than the ECB’s. Comparing the “stability” of rhetoric of both central Banks, we tend to believe that the European economy has a little more potential for exploits, allowing the ECB’s optimism to be more resilient.
In the US front, we saw a stable core PCE reading at 1.4% on Friday, in line with market expectations. Household income growth has been strong, while real spending slowed, indicating a slight slowdown in consumption. However, such a conclusion was levelled with the confidence index from the University of Michigan, which turned out to be slightly higher than the forecasts. With the current rhetoric of the Fed, an absence of negative deviations from forecasts would be enough to expect a third rate hike this year.
The strong data helped the dollar to rebound, with a correction from 9-month lows looking logical. The dollar strengthened against the other major currencies, indicating a possible closure of profitable short positions. The celebration of the Independence Day in the US may also impact the markets with the early closing of trading. The yield of US and European bonds suspended growth, after an impressive selloff last week.
Oil prices were stable following last week’s rally, as the reduced number of drilling rigs in the US did not allow the negative to penetrate the market, while OPEC continues to look for ways to curb the output of countries outside the agreement, such as Libya and Nigeria.
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