A strong set of business survey numbers appears to suit ECB’s intentions – Forex News Preview
May 22, 2023 11:27 am
With the euro experiencing a rather difficult month and confirming the various seasonality studies, this week’s data calendar has the potential to offer even more excitement. In particular, the preliminary PMI prints and the German IFO survey are expected to be closely scrutinized as certain market participants are trying to counter the elevated ECB rate hiking expectations. The euro would definitely enjoy a boost following its recent performance against both the US dollar and the pound.
ECB is on a preset course
ECB members’ intentions remain clear. They want to continue raising rates as inflation remains unchecked, despite the cumulative 375 bps of hikes since July 2022. The market appears to believe them as it is currently pricing in an 84% probability for a 25 bps rate hike at the June 15 meeting. Similarly, professional forecasts are overwhelmingly on board with this rate move as, at a recent poll, 62 out of 62 analysts endorsed this outcome. Having said that, are this week’s data releases really important for the ECB outlook?
Considering that the next meeting’s decision is almost a done deal, this week’s data figures could affect the 2023 monetary policy outlook only if they hold sizeable surprises. In more detail, an impressive set of data would cement the rate expectations for the remainder of the year and could potentially raise the possibility of a stronger rate hike at the June meeting. The ECB does not like to surprise the markets, but the hawks would probably increase their pressure in order to get a 50 bps rate decision next month.
On the other hand, a significant downside surprise at the data prints would allow the ECB doves to become more vocal. They are clearly not happy with the continuously restrictive monetary policy and could try to win over the support from the more balanced members of the governing council. However, they seem to be far from achieving their target of stopping the repeated rate hikes, especially as the labour market continues to tighten. Consequently, the market could pare back some of its rate expectations. At the moment, a total of 58 bps of rate hikes are priced in for 2023.
All eyes on the PMIs
Amidst this environment, the preliminary PMIs for May for Germany and the euro area aggregates will be published on Tuesday. This is the last set of PMIs to be released ahead of the June 15 ECB meeting; the final May PMI figures will come on June 5, but they are usually not market moving. With the Services sector expected to confirm its healthy status, the focus is once again on the manufacturing component of the survey.
Both the German and French indicators are in the 45-level region signaling a shrinking sector. While in France the recent demonstrations for the pension system amendments could offer some justification for the lower figure, the German print is troubling. It adds to concerns that have been building up since the preliminary GDP growth for the first quarter of 2023 surprised on the downside in late April.
IFO survey and final first quarter GDP for 2023 on the menu as well
Further zooming into Germany, this week we get our favourite IFO survey. The May print of the Business climate survey is seen edging lower with the Expectations component offering again a glimpse of hope. The survey figures have been on an upward trend since the September 2022 lows, but they are still far from pointing to a strong growth outlook.
In this context, professional forecasts continue to paint a mixed picture for the German GDP. Both the IMF and the IFO centre have penciled in a -0.1% annual change for 2023 with the government and the EU Commission appearing more optimistic with their +0.3% and +0.2% forecasts respectively. It is evident that China’s economic underperformance is affecting Germany, troubling the market and politicians, contrary to strong expectations for a significant positive impact.
Euro remains under pressure
The recent weakness of the euro is evident against the pound. Since the February 3, 2023 high, this pair has been on a downward path. We highlighted the formation of a descending triangle that tends to favour bearish moves. On May 9, 2023 the pair broke below the 0.8721 level, the lower boundary of the triangle, but is struggling to record a significant move lower.
The euro would really enjoy a boost and a move back inside the identified pattern. However, unless we get exceptional data and the market starts to think about a 50 bps rate hike, the impact is expected to be rather muted. On the other hand, the euro bears are keen on recording another correction and to try breaking the 0.8635-0.8670 area.
With the euro experiencing a rather difficult month and confirming the various seasonality studies, this week’s data calendar has the potential to offer even more excitement. In particular, the preliminary PMI prints and the German IFO survey are expected to be closely scrutinized as certain market participants are trying to counter the elevated ECB rate hiking expectations. The euro would definitely enjoy a boost following its recent performance against both the US dollar and the pound.
ECB is on a preset course
ECB members’ intentions remain clear. They want to continue raising rates as inflation remains unchecked, despite the cumulative 375 bps of hikes since July 2022. The market appears to believe them as it is currently pricing in an 84% probability for a 25 bps rate hike at the June 15 meeting. Similarly, professional forecasts are overwhelmingly on board with this rate move as, at a recent poll, 62 out of 62 analysts endorsed this outcome. Having said that, are this week’s data releases really important for the ECB outlook?
Considering that the next meeting’s decision is almost a done deal, this week’s data figures could affect the 2023 monetary policy outlook only if they hold sizeable surprises. In more detail, an impressive set of data would cement the rate expectations for the remainder of the year and could potentially raise the possibility of a stronger rate hike at the June meeting. The ECB does not like to surprise the markets, but the hawks would probably increase their pressure in order to get a 50 bps rate decision next month.
On the other hand, a significant downside surprise at the data prints would allow the ECB doves to become more vocal. They are clearly not happy with the continuously restrictive monetary policy and could try to win over the support from the more balanced members of the governing council. However, they seem to be far from achieving their target of stopping the repeated rate hikes, especially as the labour market continues to tighten. Consequently, the market could pare back some of its rate expectations. At the moment, a total of 58 bps of rate hikes are priced in for 2023.
All eyes on the PMIs
Amidst this environment, the preliminary PMIs for May for Germany and the euro area aggregates will be published on Tuesday. This is the last set of PMIs to be released ahead of the June 15 ECB meeting; the final May PMI figures will come on June 5, but they are usually not market moving. With the Services sector expected to confirm its healthy status, the focus is once again on the manufacturing component of the survey.
Both the German and French indicators are in the 45-level region signaling a shrinking sector. While in France the recent demonstrations for the pension system amendments could offer some justification for the lower figure, the German print is troubling. It adds to concerns that have been building up since the preliminary GDP growth for the first quarter of 2023 surprised on the downside in late April.
IFO survey and final first quarter GDP for 2023 on the menu as well
Further zooming into Germany, this week we get our favourite IFO survey. The May print of the Business climate survey is seen edging lower with the Expectations component offering again a glimpse of hope. The survey figures have been on an upward trend since the September 2022 lows, but they are still far from pointing to a strong growth outlook.
In this context, professional forecasts continue to paint a mixed picture for the German GDP. Both the IMF and the IFO centre have penciled in a -0.1% annual change for 2023 with the government and the EU Commission appearing more optimistic with their +0.3% and +0.2% forecasts respectively. It is evident that China’s economic underperformance is affecting Germany, troubling the market and politicians, contrary to strong expectations for a significant positive impact.
Euro remains under pressure
The recent weakness of the euro is evident against the pound. Since the February 3, 2023 high, this pair has been on a downward path. We highlighted the formation of a descending triangle that tends to favour bearish moves. On May 9, 2023 the pair broke below the 0.8721 level, the lower boundary of the triangle, but is struggling to record a significant move lower.
The euro would really enjoy a boost and a move back inside the identified pattern. However, unless we get exceptional data and the market starts to think about a 50 bps rate hike, the impact is expected to be rather muted. On the other hand, the euro bears are keen on recording another correction and to try breaking the 0.8635-0.8670 area.
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