Euro Slides Further Following Weak PMI Report
The EURUSD edged lower on Wednesday continuing to trade defensively following weaker than expected manufacturing data. Sentiment remains negative pushing European yields lower, generating headwinds for the European currency.
The Eurozone September manufacturing PMI was revised down to 50.3 from 50.5 reported initially and versus 50.7 in August. The main surprise was the downward revision to the German reading to 49.9, which suggest a slight contraction in manufacturing activity after 15 months of expansion. The French reading was confirmed at 48.8 and the Italian reading unexpectedly rose to 50.7 from 49.8. The Spanish PMI also holds above the 50 point no change mark. Still, the drop in the German reading will add to concerns that the German growth motor is running out of steam amid the tensions with Russia and together with the renewed dip in headline HICP the numbers will add to pressure on the ECB to consider further easing.
The ECB is expected to release the details of the Asset Backed Securities purchase program tomorrow and it seems Draghi is pushing for a broader asset class to be considered, which could also include Greek and Cypriot ABS, currently not accepted by the ECB. Therefore, a riskier expansion of the ECB’s balance sheet, could be in the cards.
Germany sold 4.108 billion of 10-year Bunds with a coupon of 1% at an average yield of 0.93%, down from 1.05% in the previous auction. This was the first time the yield was below 1%, but at these low returns, demand is drying up. Bids for the 5 billion on offer amounted to 4.663 billion, so the auction was effectively undersubscribed, although with the Bundesbank holding back 0.892 billion for market smoothing purposes, the official bid to cover ratio was 1.1, down from 1.4 in the previous auction.
Momentum on the EURUSD has turned negative as the MACD (moving average convergence divergence) index generated a sell signal. The relative strength index (RSI) moved lower with price action reflecting accelerating negative momentum, while printing a reading of 21, which is below the oversold trigger level of 30 and could foreshadow a correction.
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