EUR/USD punched in the face as manufacturing PMI sinks to all time low

The EUR/USD pair declined by 50 basis points after data from Markit showed that manufacturing PMI dropped to a record low in April.

Eurozone manufacturing PMI disappoints

The manufacturing PMI in the eurozone dropped to a record low of 33.4 in April. This was lower than the contraction of 44.5 that was recorded in March. According to Markit, this contraction was mostly because of the ongoing lockdowns and social distancing policies.

The manufacturing PMI in Germany dropped to 34.5 from the previous 45.4 while in France, it fell to 31.5 from the previous 43.2. Analysts polled by Bloomberg were expecting the two PMIs to come in at 34.4 and 31.5 respectively. The contraction in France was the lowest level on record while in Germany, it was the lowest since 2009.

In the eurozone, the best-performing countries were the Netherlands and Ireland while the worst was in Greece, Spain, and Italy. According to Markit, the sharp contraction was because of delays in transport routes and low demand. In a statement, Chris Williamson, the Chief Business Economist at Markit, said:

“With virus curves flattening and talk now moving to lifting some of the pandemic restrictions, April will have hopefully represented the eye of the storm in terms of the virus impact on the economy, meaning the rate of decline will now likely start to moderate.”

The PMI is an essential number calculated by surveying purchasing managers at major organisations. The final number is used to gauge their activities during the surveying period. According to Markit, a PMI reading above 50 is usually a sign of expansion. A figure above 50 is typically a sign of contraction.

In the past two months, manufacturing activities have slowed down due to the shutdown implemented by most countries. According to Markit, the global PMI declined to 47.6 in March as lock down policies affected demand and supply chains.

Just last week, data from China showed that the PMI dropped to 49.4 in April after rising to more than 50 in March. In the report, Caixin and Markit blamed the contraction to “re-intensification of the loss of export sales, which dropped to the lowest level since 2008.”

Similarly, the UK and US manufacturing PMI declined to 32.6 and 36.1 in April respectively.

A series of negative news from Europe

The EUR/USD pair has been rocked by a series of negative data from the United States and Europe. In Europe, annual inflation dropped to a record low of 0.4% in April, which is significantly below the ECB target. In Germany, the unemployment rate rose from 5.0% to 5.8% while the Spanish GDP declined by 5.2% in the first quarter.

Similarly, the overall GDP in the eurozone dropped by a record 3.8% in the first quarter while Italian GDP dropped by 4.7% in Q1. At the same time, European leaders have disagreed on the right funding package to aid in the recovery.

The situation has been worse across the pond. The unemployment rate in the US is expected to rise to above 14%. More than 30 million Americans have filed for jobless claims. Retail sales have dropped, the housing market is in trouble, and industrial production has dropped to the lowest level since 1946. As a result, the GDP dropped by 4.8% in the first quarter, which was the lowest level since the 2008/9 financial crisis.

The eurozone manufacturing PMI data came a few days after the ECB delivered its interest rates decision. The Christine Lagarde-led bank left rates unchanged and removed the cap on its €750 billion quantitative easing program.

In the meantime, countries across Europe have started to reopen their economies. According to Markit, the biggest risk will be a second wave of the virus. Chris Williamson said:

“Barring any second wave of infections, which would throw any recovery off course, the news should start to improve as we see more people and businesses get back to work.”

EUR/USD technical outlook

The EUR/USD declined at a time when bullish bets on the euro by hedge funds are falling. Data released last week showed that hedge funds had a net long position of 79.7k contracts last week. This was lower from the previous week’s 87.2k.

On the four-hour chart, the EUR/USD pair moved to an intraday low of 1.0925. This price is slightly below the 38.2% Fibonacci retracement level. It is also slightly above the 50-day exponential moving average. I expect the pair to likely continue declining as bears attempt to test the 23.6% retracement level at 1.0837.