Euro Pares Gains As Soft PMI Figures Undermine ECB's 'Higher for Longer' Message

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Enthusiasm for the Euro was curtailed by a disappointing survey of the Eurozone's economy that revealed activity fell in December and undermined the European Central Bank's message on interest rates.

The Euro was softer against the Dollar and Pound after S&P Global's Eurozone manufacturing PMI read at 44.2 in December, which was unchanged on November but below the consensus expectation for 44.6.

Services disappointed at 48.1, which was softer than November's 48.7 and below the expectation for 49. This takes the Eurozone's composite PMI measure to 47, down from 47.6 and below expectations for 48.

The Euro had risen against the Dollar and other currencies on Thursday after the European Central Bank (ECB) released relatively upbeat projections for the economy, saying this justified interest rates remaining unchanged for the foreseeable future.

These data, however, question this stance and will bolster market bets for a rate cut falling as early as March.

"Any lack of material improvement in today’s Eurozone flash PMIs for December could somewhat curtail the relative optimism embedded in the ECB and EUR," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The Euro to Dollar exchange rate has fallen back from the cusp of 1.10 to 1.0965 at the time of writing. The Euro to Pound rate is lower by 0.40% at 0.8580.

"There’s a bit of a pullback today for the euro following a very poor batch of flash PMI readings out of the Eurozone," says Raffi Boyadjian, Lead Investment Analyst at XM.com. "The UK economy on the other hand seems to be faring notably better. Although the manufacturing PMI disappointed, the services sector appears to be bouncing back, pushing the composite PMI to a 6-month high of 51.7."

Business activity in the Eurozone fell at its fastest rate for 11 years, barring only the early 2020 pandemic months, said S&P Global.

Jobs were cut for a second month running as firms scaled back operating capacity in line with the worsening order book situation

Future sentiment remains well below its long-run average despite lifting slightly higher.

Employment fell for a second consecutive month as companies scaled back capacity in line with the weakened demand environment, which will bolster market expectations for ECB rate cuts in 2024.

The recent falls in employment were the first recorded since early 2021, suggesting the labour market is cooling in a manner consistent with slowing inflation rates.

The data will cast doubts on the credibility of the ECB's recent guidance, which could undermine the Euro's ability to advance higher from current levels.