Euro Rallies on Surging Economic Comeback

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The message from the April Purchasing Manager Survey (PMI) is clear: the Eurozone economy is rallying back in a strong fashion thanks to a rebound in the bloc's services sector.

The headline Eurozone composite PMI read at 54.4 in April, breezing past expectations for 53.7 and representing an improvement on the previous month's reading of 53.7.

According to S&P Global, compilers of the widely respected PMI survey series, Eurozone business activity growth accelerated to an 11-month high in April.

The services PMI registered a blow-out 56.6, exceeding estimates for 54.5 and accelerating on March's 55.

This leaves little doubt that the European Central Bank (ECB) will hike interest rates in May and potentially again at subsequent meetings.

The Euro to Pound exchange rate rose a quarter of a per cent to 0.8838, the Euro to Dollar exchange rate was as low as 1.0940 ahead of the release and rallied to 1.0970 in the minutes following.

S&P Global says the upturn was driven by reviving demand and was accompanied by "the largest increase in employment for nearly a year."

On the face of it, ECB interest rate hikes are therefore not registering on demand and this could mean the bloc's core inflation level remains elevated for longer unless further rate hikes are delivered.

Expectations for further hikes underpin Eurozone bond yields and this is driving inflows of foreign investor capital, confirmed yesterday by the region's most recent Balance of Payments figures.

HSBC's economists expect the economic picture to improve further and further widen the current account surplus.

"This should underpin further upside for EUR-USD," says Dominic Bunning, a foreign exchange strategist at HSBC. "It is hard to argue that the EUR is too elevated. We continue to see a further rally to 1.15 in the months ahead."

A potential 'fly in the ointment' was the ongoing malaise in Eurozone manufacturing with the PMI for April reading at 45.5, consistent with contraction.

This is worse than the 45.5 the market was expecting and is down on the previous month's 47.3.

Germany is of particular concern as the German manufacturing PMI read at 44 in April, but it was the German services PMI at 55.7 that lifted the composite into growth territory at 53.9.