Euro Extends Gains Following the German PMI

EUR-USD traded on a supportive footing in to the European session. Firmer Asian equity markets encouraged good demand on dips, which lifted the pair back in to the 1.4200 area from Asian lows of 1.4136. An Asian sovereign account was a strong buyer on the way up and EUR-JPY experienced good demand from fund names, which lifted the cross to 134.81 from 133.86 lows. Gains from here may be hampered after some disappointing earnings and guidance from Microsoft, Amex and Amazon, which will dampen European indices and already weighed on U.S. futures. Eurozone data has also come in the softer side so far, with German May construction order down 0.2% m/m and French July consumer confidence declined t -39 from -37 in June. Option expiries at 1.4200 may influence, with associated hedging activity tending to have a greater impact on price action this last week due to thin summer trading conditions.

German PMIs jump higher, with the manufacturing PMI advancing to 45.2 in July from 40.9 in the previous month, while the services PMI jumped to 48.4 from 45.2. Our medians were 42.2 and 46.2 respectively, so positive surprises. The French manufacturing PMI also came in higher than expected, which means our forecast for the eurozone manufacturing PMI of 43.1 (median 44.1) is likely to be too conservative. The sharp improvement in the German services PMI, however, stands in stark contrast to the disappointing French reading. Our forecast for the eurozone services PMI was 45.2, slightly less optimistic than our median of 45.5 and compared to 44.7 in June. The stronger than expected German readings pushed Bund futures back down again and the September 10-year future is now down 1 tick on the day at 120.55, but futures remain jumpy.