Euro Softer as August Eurozone Services Data Disappoints Market

Eurozone services industry data disappointed the market for August but remains consistent with a solid rate of quarterly GDP growth, according to IHS Markit.

The Euro struggled in European trade Tuesday after key services data from across the currency bloc left bullish speculators holding the bag.

French, Italian and Spanish services sector PMIs all came in below economist forecasts, disappointing the market at the beginning of a week when the Eurozone’s economic recovery is placed under the spotlight by investors and policymakers alike - and driving the decline in the composite index.

The composite Eurozone services index slipped to 54.7, down from 54.9 in the earlier Flash survey, and against economist forecasts for a steady print of 54.7.

The fall in the composite PMI was less pronounced than in some individual country surveys given a strong showing from the German services sector and its hefty weighting in the broader Eurozone basket. The Irish sector also held up well, according to the announcement from IHS Markit.

“The summer months have seen eurozone economic growth moderate only slightly from the rapid pace seen in the spring. The solid PMI readings for July and August set the scene for another strong GDP number for the third quarter, with the surveys running at a level historically consistent with 0.6% growth,” says Chris Williamson, chief business economist at IHS Markit.

The composite result came after the French PMI fell from 55.5 to 54.9, the Italian index dropped from 56.3 to 55.1 and the Spanish index fell nearly a full two points, from 57.6 to 56.0.

Germany’s services sector remained firm during the month, with the index holding at the 53.4 predicted by the earlier flash surveys.

Currency Reaction

With Thursday's European Central Bank policy decision forming the main event of the week for the Euro, markets were already nervous on pushing the currency any higher.

The data merely tips the balance in favour of the sellers.

The Euro to Pound exchange rate reversed its earlier gains, falling 0.12% to 0.9191 in response to the news, while the Euro to US Dollar rate dropped 0.11% to 1.1878.

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ECB Ahead

“The survey data also highlight how price pressures have meanwhile edged higher alongside the strong economic upturn, adding to the perception that the ECB will soon announce its intention to taper its stimulus in 2018 if conditions remain supportive, most likely at its October policy meeting,” Williamson noted.

Tuesday's services data comes an hour ahead of the monthly retail sales number and the latest GDP number for the currency bloc.

“We expect the breakdown of Euro area GDP growth to show that net exports added to GDP growth for the second quarter in a row, while investment demand remained a strong drive,” says Michala Marcussen, global head of economics at Societe Generale.

The survey and output data comes ahead of a crucial meeting for the European Central Bank, scheduled for Thursday, in which policy makers are expected to set out their views on a host of subjects.

“Our economists expect the ECB to announce a six month extension of the asset purchase program on Thursday, and little volatility in EGB rates on Monday suggests that this is not the consensus view,” Marcussen wrote in her morning note.

Markets will listen closely Thursday for clues to what the currently-strong Eurozone recovery could mean for the ECB’s bond buying program, the merits of continued stimulus and the recent strength of the Euro.

“The main focus at the ECB meeting is likely to be how big a problem the current pace of euro appreciation is for the ECB. We expect Mario Draghi to express concern about this and explicitly mention that the stronger euro is the main reason the ECB has lowered its inflation projection and that there is further downside risk,” says Pernile Bomholdt Henneberg, an analyst at Dankse Bank.