EUR/USD Edges Higher as Flash PMI Shows Euro Area at Seven Month High

The latest flash Purchasing Manager’s Index (PMI) for the euro area from Markit has revealed that for August, business sentiment has edged to its highest index score in seven months, leaping to 53.3 from the 53.2 that was recorded last month.

Growth in the third sector is expected to match the progress of the first half of the year, despite the increase in the index score, where 50 is neutral, it is little above the average for the year so far, the survey also shows that the ‘Brexit’ factor also has not immediately damaged the euro area, and that the recovery has not been derailed, Markit believe that the index is consistent with the 0.3% of quarterly growth.

Output accelerated in the manufacturing and service sectors, albeit at a marginal rate, with the former having a more stronger pace of expansion, although there were greater variables when reviewing order books, where manufacturing experienced a slowing in demand.

In contrast the service sector celebrated new business coming in at the fastest rate in four months, while new factory orders slipped to its slowest rate in 18 months.

Inflationary pressures were negligible, even though input prices had increased for the fifth consecutive month, the rise was the smallest since April, while average selling prices dropped at a faster rate than in July, continuing the five year trend of falling prices, not something that will please the European Central Bank, who have taken significant measures to boost inflation.

Alarmingly for the euro area, there appears to be signs that the strongest period of job creation over the past five years is now showing signs of easing, even though there were increases in employment in August, it was at a three month low, hiring in manufacturing and services was not as strong.

France enjoyed its highest upturn in growth since last October, seemingly placing the French economy to its best quarter of growth this year, a turnaround from the 0% growth that was posted from the second quarter this year.

Overall, the euro area’s positive return on the PMI was not matched by its most powerful economy, as the flash PMI for Germany revealed a two month low, with the slowest rate of expansion in services for 15 months, leaving business confidence in the sector at a two year nadir due to subdued demand and challenging market conditions.

The index score for Germany was still a positive 54.4, but this was down from the 55.3 in July, but remains in line with the latest GDP growth rate of 0.4%, which was a fall of 0.3% from the first quarter of the year.

New business continued to rise in August, but the pace of growth was slower overall, manufacturing was the most encouraged sector, as fresh export orders increased to the highest volume in two and a half years, manufacturers were more cautious about their stock policies this month, with finished goods dropping by the fastest pace since 2010.

Input prices continued to rise in Germany, extending this sequence of inflationary pressures to four months, and the second strongest rise in over a year.

The euro has reacted positively this morning CET, continuing its climb on the US dollar, despite some of the hawkish recent comments from Federal Reserve Chairman Stanley Fischer, which may point to a rate rise, the EUR/USD rose to just over $1.335 and the PMI results were released, before calming to $1.331.