Improving European data boosts ECB and BOE hike bets

• Euro FX crosses in focus following earlier European data and ahead of US and Canadian macro pointers
• Eurozone services PMI again topped estimates, but manufacturing remained in contraction for 8th month
• ZEW beat expectations for 5th consecutive month
• UK PMIs show economy remains surprisingly resilient despite double digit-inflation

The euro struggled to show strength in the first half of Tuesday’s session, despite mostly positive data from the Eurozone. But the pound strengthened as the UK private sector returned to growth, easing recession fears and boosting the GBP/USD back up to 1.21. The stronger UK PMI data weighed on the EUR/GBP cross, which in turn held the EUR/USD back. The EUR/USD and EUR/CAD pairs will remain in focus in the second half of Tuesday’s session ahead of potentially market moving data from North America.

Eurozone and UK could avoid a recession in Q1

This morning’s publication of stronger European data again suggests that the eurozone and UK economies remain surprisingly resilient despite high levels of inflation. It looks like a recession might be avoided in Q1, boosting expectation that both the ECB and BoE will tighten their respective monetary policies further. The former is likely to hike rates by another 50 basis points to 3.5% on 16th March, and the latter by 25 bps to 4.25% at its next meeting on 23rd March. However, looking beyond Q1, the past sharp interest rises, and stickiness of inflation, means the economy is likely to struggle as household finances continue to feel the squeeze. Much will, of course, depend on data at the time.

Eurozone services PMI beats but manufacturing disappoints

The Eurozone PMI improved to 53.0 in February from 50.8 the month before, easily beating expectations. As a result, the composite PMI increased to 52.3 from 50.3. The data points to accelerating growth and with price expectations still high, this should keep the ECB vigilant.  While the eurozone services sector is continuing to show impressive improvement, the manufacturing sector remains a weak point, with French PMI showing a sizeable drop to 47.9 from 50.5 the previous month. In Germany, the manufacturing PMI fell deeper in contraction territory to 46.5 from 47.3, confounding expectations of a slight improvement.

Today’s PMI data is overall positive and in line with the recent trend. Supply side problems are continuing to fade, and this is continuing to provide a boost to the economy as backlogs of orders go into production. Thanks to a mild winter, an energy crisis has been averted. As we head towards warmer months ahead, this should ease the pressure further. Gas prices are now a third of what they were at the back end of last year. This is helping to boost consumer confidence that peak inflation has passed and that a recession may be avoided or will be milder than previous thought.

Still, the ECB will likely remain in a contractionary mode with regards to its monetary policy. Thanks to high levels of inflation, we are continuing to see rising wage pressures, especially in the services sector as reported by purchasing managers in the sector. Rising wage costs along with an improving economic activity will likely keep the ECB in a hawkish mode for a while yet.

German ZEW survey also beat

The closely watched German ZEW survey also topped expectation, providing the euro bulls more reason to be cheerful. ZEW’s Economic Sentiment Index rose to 28.1 in February from 16.9 in January, beating expectation of 22.0. The Current Situation Index improved to -45.1 from -58.6, outpacing expectation of -50.0. Meanwhile the ZEW Economic Sentiment Index for the Eurozone jumped to 29.7 from 16.7. 

EUR/USD remains under pressure – for now

The EUR/USD bounced off its lows on Friday but has since struggled to make further recovery. It hasn’t responded positively to today’s mostly stronger Eurozone data, thanks to the slumping EUR/GBP exchange rate which has benefited from even stronger UK PMI data. The EUR/USD has dropped about 400 pips from its recent high above 1.10 handle to near the 1.0600 handle. Thus, the potential for a rebound is there as some of the hawkish factors supporting the dollar have been priced in. We have meanwhile seen some hawkish commentary from the likes of ECB's Schnabel. This combined with the stronger ZEW survey and services PMI, as well as hotter-than-expected German PPI we saw last week, could help to provide some relief for the euro. What the bulls need to see is a move above Friday’s hammer candle, or another key reversal sign, before stepping in.

Source: StoneX and TradingView.com

EUR/GBP drops as UK PMIs even more impressive

The EUR/GBP has fallen below 0.88 handle after data showed the UK’s private sector returned to growth, easing recession fears and boosting the GBP/USD back up to 1.21.  The Composite PMI jumped to 53.0 from 48.5 in January. The Manufacturing PMI improved to 49.2, easily beating expectation of 46.8. More importantly, the Services PMI climbed to 53.3 from 48.7, well above the boom/bust level of 50.0.

Commenting on the survey, "while the data suggest that near-term recession odds have fallen considerably, elevated inflation pressures clearly remain a concern, especially in the service sector," noted Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

Given the resilience of the economy, the BoE will be happy to raise interest rates further to tackle double-digit inflation.

Source: StoneX and TradingView.com

EUR/JPY looks more promising for bulls

Among the euro crosses, the EUR/JPY looks the most promising for the bulls after it broke the key 143.00 level which had provided a ceiling to previous breakout attempts. Though rates have pulled back after testing another resistance level around 143.85, for as long as it holds the breakout above 143.00, the bulls will be happy. Can we see a move towards 145 next?

Source: StoneX and TradingView.com

Key data coming up from North America

S&P Global will posts its US Manufacturing and Services PMI surveys at 14:45 GMT. Analysts expect purchasing managers to report that economic activity remained in contraction territory for both sectors, with the PMIs seen printing around 47 for both. This should keep the EUR/USD pair in focus (see above for more).

Perhaps more important will be CPI and retail sales data out of Canada at 13:30 GMT to provide some volatility for the CAD pairs. Among them is the EUR/CAD, which has started to hesitate to go further higher, creating a potential head and shoulders formation. It will need a strong set of Canadian numbers to break the neckline around 1.4250.

However, if the Canadian data comes in weaker, or we otherwise see a move north of 1.4400 resistance area, then this will signal the resumption of the bullish trend.

Source: StoneX and TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R