Flash June PMIs Could Upset Forex Narrative
Tuesday’s Flash PMIs for June are likely to be the most important data for currencies other than the dollar, but the Euro could be the most impacted. As markets try to digest how the latest developments in the Strait of Hormuz will affect the monetary policy outlook, economic performance is now the leading driver of currencies. PMIs are particularly useful in that context because they are “forward-looking,” providing insight into the economy before official data is released.
The main issue for markets is how much “room” central banks have to deal with inflation. That is, if the economy is growing or accelerating, then it is easier for central banks to raise rates to slow inflation. That means policymakers have greater “credibility” in controlling consumer prices. Slow-growing economies make it much harder for the central bank to raise rates without risking a recession. This means those currencies are more likely to underperform.
The First Post-Deal Data
Another important factor for these upcoming PMIs, in particular, is that they are partial results from an ongoing survey. Some of the responses came earlier in the month, but there is still likely to be a substantial number of responses after US President Donald Trump announced that a deal had been reached with Iran. Although there was (and is) considerable uncertainty about the situation in the Middle East, PMI figures could provide additional insight into how businesses are reacting.
Again, this is likely to be more important for Europe, which has been facing the greatest challenges from the energy supply shock. Eurozone Q1 GDP turned negative, and the ECB was among the first major central banks to hike directly in reaction to the Persian Gulf issue. Traders will be closely monitoring the June data for signs of improved investor sentiment to gauge whether the Eurozone economy might rebound.
What the Market is Looking For
French and German, and then Eurozone, flash June PMIs come out in quick succession on Tuesday, with the first two large countries generally setting the tone and the market reaction. Usually, the market reacts to Eurozone data only if it differs substantially from the first two readings. The French composite PMI is expected to remain in contraction at 45.1, up from 44.9 in May.
The German flash composite PMI for June is projected to remain in contraction at 49.5, but rise substantially from the prior 48.8. This would leave the Eurozone reading advancing to 49.1 from 48.5, but staying below the 50 threshold separating expansion from contraction. However, the services component could receive extra attention after the ECB expressed concern that the energy situation could more significantly affect service prices.
UK Manufacturing Expanding
Across the channel, Britain is expected to maintain better results thanks to its North Sea oil not weighing as heavily on the industrial sector. Manufacturing PMI is anticipated to stay expansionary at 53.4, but trimmed from 53.9 prior. Here, too, the focus could be on services, which are expected to slip further into contraction to 49.0 from 49.3.
The US is expected to remain expansionary across the board, but the composite index is projected to fall to 50.6 from 51.5 previously. Most of that is expected to be due to a slowing in the manufacturing sector, as higher domestic oil prices raise costs for producers.
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