Eurozone Composite PMI and French Inflation Signal Economic Shift

It was a busy day ahead for the EUR/USD. Early in the European session, French prelim inflation figures drew interest. Following the softer inflation numbers from Germany, French inflationary pressures softened at the end of the year.

Member State Economic Indicators Ease Market Jitters

According to prelim figures, the French annual inflation rate softened from 6.2% to 5.9%. Economists forecast an inflation rate of 6.4%. The numbers were positive, with the need for less aggressive ECB monetary policy moves likely to limit the damage to the euro area economy.

Private sector PMI numbers for December were also upbeat.

The Spanish services PMI increased from 51.2 to 51.6, with Italy’s services PMI up from 49.5 to 49.9. Economists forecast PMIs of 50.8 and 49.5, respectively.

Finalized numbers for France, Germany, and the Eurozone also impressed, raising question marks about the gloomy economic outlook.

The French Services PMI rose from 49.3 to 49.5 versus a prelim 48.1, with Germany’s services PMI rising from 46.1 to 49.2 versus a prelim 49.0.

Eurozone Composite PMI Give Hope

As a result, the euro area services PMI increased from 48.5 to 49.8 versus a prelim 49.1. Following better-than-expected manufacturing PMI numbers on Monday and today’s services PMIs, the Eurozone Composite PMI rose from 47.8 to 49.3, up from a prelim 48.8.

According to the finalized euro area Composite survey,

• The euro area private sector contracted for the sixth month in a row but at the slowest rate since July.
• Manufacturing sector woes continued to be the main drag on the private sector.
• Weak demand pegged back output volumes, though the rate of decline in new orders was the weakest since July.
• Despite weak orders, staffing levels increased further in December. However, the rate of job creation was unchanged from the 21-month low registered in November.
• Importantly, input cost inflation slowed to a 19-month low, leading to an easing of output charge inflation, which increased at the weakest pace in a year.
• Slowing inflationary pressures and improving economic conditions supported a pickup in business confidence. However, concerns over energy and high inflation continued to pressure sentiment.

Today’s stats provided further hope of a brighter economic outlook for the euro area. Softening inflationary pressures and improving private-sector activity could entice a pickup in demand to drive an economic recovery through Q1 2023.

EUR/USD Price Action

Ahead of today’s economic indicators, the EUR/USD rose to a pre-stat high of $1.06061 before easing back. However, in response to the softer inflation numbers, the EUR/USD rose to a day high of $1.06354.

The private sector PMIs also provided EUR/USD support, with the EUR/USD up from a low of $1.06056 to a post-PMI high of $1.06300.

At the time of writing, the EUR was up 0.66% to $1.06190.

Up Next

No ECB members are speaking today, leaving investors to turn their attention to the US economic calendar.

The favored ISM Manufacturing PMI for December and JOLTs job openings for November will be in focus early in the US session. While we expect market sensitivity to both reports, the JOLTs job openings could have more influence ahead of the Friday jobs report.

However, the FOMC meeting minutes should have more impact late in the session. The markets expect hawkish minutes that delivered the dollar breakout on Tuesday.