German Woes Won't Halt the Euro-Dollar Rebound: PMI Reactions

Germany, the Eurozone's economic engine, posted astonishingly weak manufacturing numbers on Thursday, but Euro exchange rates didn't bat an eyelid as traders opted to focus on improvements in the broader Eurozone PMI.

The German manufacturing PMI for February read at 42.3, sharply lower than January's 45.5 and well below consensus expectations for 46.1, in a clear signal the downturn is worsening.

"February saw a further drop in business activity across the eurozone’s largest economy, in a continuation of the downturn that began in the middle of last year," says S&P Global, compilers of the PMI survey.

Above: Euro to Dollar exchange rate showing price action on February 22. Track EUR/USD with your own custom rate alerts. Set Up Here

Euro-Dollar is nevertheless riding higher by about half a per cent on the day at 1.0867, suggesting the market has largely become immune to disappointments in Eurozone economic numbers.

The resilience does suggest Germany's economic downturn is priced in.

It also suggests markets are looking for signs of bottoming across the Eurozone, with the S&P Global all-Eurozone services PMI rising to 50 from 48.4 and beating expectations for 48.8.

Meanwhile, the Eurozone's composite PMI was up to 48.9 from 47.9 previously, surpassing expectations for 48.5. So, while the Eurozone is being held back by Germany's struggling manufacturing sector, the pan-European services industry is looking better.

This can ease concerns about the outlook for the region and underpin the Euro against the Dollar, which has softened more broadly this week.

"The eurozone economy is far from out of the woods at the moment, but the PMI does indicate that some improving service sector activity could help the region to avoid another quarter of contraction," says Bert Colijn, Senior Economist for the Eurozone at ING Bank.

Above: Eurozone PMIs suggest the Eurozone economy remains stagnant despite the positive surprises contained in today's data.

The PMIs confirm another interesting phenomenon: a sharp divergence in the fortunes of the various Eurozone economies and regions.

In particular, Germany and France, the two biggest economies, are underperforming relative to the so-called peripheral nations, such as Spain and Greece.

"The rest of the eurozone, for which no individual PMIs have been released so far, led the way with a stronger performance than the two large markets," says Colijn.

The inflation component of the survey reveals prices continue to fall, although service sector businesses continue to indicate price increases are accelerating. This can give the European Central Bank reason to keep interest rates unchanged for some time yet.

"While inflation remained relatively benign in recent months, signs like this are good arguments for hawks to push against rate hikes in the coming two meetings," says Colijn.

This would be an outcome that is ultimately supportive of the Euro.