EUR/USD turns lower as EU business activity slips to a worrying low

The EUR/USD pair declined as the market reacted to the disappointing manufacturing PMI data released by Markit. Investors also reacted to the rising yields on Italian government bonds.

European Union manufacturing PMI slips

The manufacturing sector in the European Union has been affected significantly by the current coronavirus pandemic. Many companies like Daimler, Volkswagen, and Airbus have been forced to idle their plants because of the shutdowns. Other small manufacturers have either filed for bankruptcy or approached the government for assistance.

The extent of the slowdown was laid bare by Markit, which released the manufacturing and services PMI data for the region.

The manufacturing PMI in the EU dropped to a record low of 18.4in April. This was worse than the March slowdown of 44.5 and the worst it has been since 1998. In a statement, Chris Williamson of Markit said:

“Our model which compares the PMI with GDP suggests that the April survey is indicative of the eurozone economy contracting at a quarterly rate of approximately 7.5%.”

In France, the manufacturing PMI dropped to 31.5 from the previous 43.2. In neighbouring Germany, the PMI dropped to a record 34.4 from the previous 45.4.

On a positive sign, many European countries are starting to restart their economies. For example, Germany and Spain have started to gradually open businesses. This means that the future numbers will likely be better. The main risk is that of a secondary wave of coronavirus infections.

EU services PMI disappoint

The EUR/USD pair also reacted to the weak services PMI data from the region. Data from Markit showed that the services PMI dropped to 11.7 in February from the previous 26.4. This was is the lowest level recorded since 1998. According to Markit, the decline was due to sectors like hospitality, accommodation, and tourism.

In Germany, the services PMI dropped to a record 17.1 from the previous 35.0. This pulled down the composite PMI down to 17.1. Meanwhile, in France, the services PMI dropped to a record low of 10.4 from the previous 27.4. In a statement, Phil Smith of Markit said:

“April’s PMI surveys reveal the full effects of the COVID-19 pandemic and subsequent lockdown on Germany’s economy, showing business activity across manufacturing and services falling at a rate unlike anything that has come before. Compared to a low of 36.3 during the financial crisis, the headline PMI’s reading of 17.1 paints a shocking picture of the pandemic’s impact on businesses.”

As a result, the composite PMI declined to a record low of 13.9, which is the lowest level since 1998.

This data came a day after data from the European Commission said that consumer confidence had dropped to minus 22 in April.

Italian debt in focus

The EUR/USD pair is also responding to the problems facing Italy, which is a leading member of the EU. As one of the most indebted countries in the region, Italy was having problems before the crisis started.

The current risk is that the country’s government bonds have risen to their highest level since March. Yesterday, the yield on the ten-year bond rose to 2% yesterday while the spread with German bonds widened to 2.6%. That was slightly below the peak of 2.8% in March. The situation could get worse if S&P Global downgrades Italy when it publishes its review tomorrow.

In a statement to the Financial Times, James Athey of Aberdeen Standard said:

“Italy is being hit on all fronts.  It’s a very weak economy to start with, with fractious politics and a high debt load. Then they’ve borne the brunt of Covid. Even with the ECB, the market is questioning whether this is sustainable.”

In another article early this month, Wolfgang Munchau said that Italy would likely default on its debts and lead to another debt crisis. He wrote:

“Matteo Salvini, a more marginalised political figure in Italian politics since last year, may bounce back. If he were to win an election in 2022 or 2023, his government might be tempted to default on Italy’s debt. And then what?”

Today, European Union leaders will meet to deliberate on the bloc’s long-term funding. The meeting will have some serious differences. On the one hand, countries like France, Italy, and Spain want the region to raise money jointly. This has been rejected by Germany and Netherlands.

EUR/USD forecast

The hourly chart shows that the EURUSD pair has been on a downward trend since Thursday last week. In this time, the pair has moved from a high of 1.0990 to a low of 1.0983. This price is below the 100-day and 50-day EMA and below the important support of 1.0812. The pair could continue moving lower, although some volatility could come when the US releases the jobless rates data.