Thursday, July 25, 2019

Fresh Eurozone data does not bode well for Mario Draghi’s outlook today

  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil


The European PMIs missed badly yesterday, just one day ahead of the European Central Bank meeting on monetary policy due later today. The German manufacturing reading tanked to 43.1 while the Eurozone figure also printed in negative territory at 46.4. Composite data from both regions came in around 51.5 with previous expectations set for an above-52 printing, highlighting the degree of slowdown in productivity in the broader Euro area. So, in light of this strongly bearish data, will Mario Draghi be pushed to cut interest rates immediately?

This is the main question on everyone’s mind this morning and we will soon find out. According to Bloomberg, the likelihood of a rate cut remains around 38% after the PMIs were released, compared to 39% yesterday. The Euro extended its slide only marginally to 1.1140 during the past session as the dovish figures didn’t really surprise anyone, with Europe’s struggles in terms of growth and productivity well-known by now. Given the current odds for the ECB to cut today, we think that Draghi will stay put but instead use this meeting to prepare investors for a move before pulling the trigger.

This doesn’t mean that the Euro will reverse its bearish course if the ECB doesn’t act today, as the most likely takeaway will be that an easier policy and potentially more QE are coming. The shared currency is currently trading just above the 1.1120 level, which is a key medium-term support, and a break below this - potentially after a very dovish Draghi later today - will open the door for a move towards the 1.0950 area in the coming weeks. The German IFO Survey will also be released earlier in the day, but it’s clear that market participants will care more about what Draghi has to say so the figures will largely go unnoticed.

Elsewhere, the Dollar traded sideways but retained its bullish bias over the past 24 hours despite the fact that US 10-year yields turned lower. Fresh data from the US highlighted the weakness in domestic growth once again, with the preliminary manufacturing PMI reading for July dropping to 50 while investors will turn their attention on the Durable Goods Orders figures later today. The report is expected to indicate an uptick in demand for long-lasting, big-ticket goods but it pays to keep an eye on the “ex Transportation” and “ex Aircraft” sub-components of the report, that portray more accurately how confident the consumer is over his long-term spending.

A week reading in both parts of the report, as expected, will validate the Fed’s intention to cut rates next week and may take a toll on the Dollar going forward. Dollar/Yen is trading above the 108 mark but a soft set of data could open the door for a correction towards the 107.50 area and below. Dollar/Swiss has also come off its recent highs and some weakness from the greenback’s side may drive prices towards the 0.98 floor.

Meanwhile, Gold extended its sideways move for a second day treading water on either side of the $1,420 area. As we mentioned earlier in the week, the direction for the yellow metal will be dictated by the fresh US data and if today’s figures shape expectations for more rate cuts from the Fed until the end of the year, then prices may pick up pace again. A break above the recent $1,430 highs will expose Gold to a rally in the direction of the $1,440-45 area.

Finally, equities ended the day mixed yesterday with the EuroStoxx 50 closing flat and the US markets lacking consistency. The Dow Jones was down 0.29% while the S&P and the NASDAQ notched a small advance. This morning, futures on both sides of the Atlantic are trading with a bullish bias and market participants seem to be pleased that the US and China will start negotiating again next week. Nonetheless, the odds for a final resolution are very low at this point so investors’ optimism may prove short-lived very soon.


  • German IFO Expectations - 12pm
  • German IFO Current Assessment - 12pm
  • European Central Bank Rate Decision - 3.45pm
  • Draghi Speaks in Frankfurt After Policy Decision - 4.30pm
  • US Durable Goods Orders - 4.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research