Euro-Dollar Ticks Higher on PMI Beat

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The Euro to Dollar exchange rate ticked higher after a survey of the Eurozone economy showed a pick-up in activity in May.

The S&P Global PMI survey for May showed the services sector remains firmly in growth territory at 53.3, slightly undershooting expectations for 53.5. However, the Manufacturing PMI surprised with a reading of 47.4, exceeding expectations for 46.2.

The Composite PMI, which jigs the data to account for the broader economy, read at 52.3, which is ahead of the 52 expected.

In response to the upside surprises, the Euro-Dollar exchange rate rose 1.0837 in the minutes following the release, having been at 1.0810 in the minutes prior.

"The economic recovery in the eurozone gained momentum in May," said S&P Global. "Faster increases in business activity, new orders and employment were all recorded midway through the second quarter, while business confidence hit a 27-month high."

The prospect of an improving economic outlook could ease pressure on the European Central Bank to follow up the expected interest rate cut with a succession of follow-through cuts.

The erosion of these rate cut expectations can support Euro exchange rates via the interest rate channel.

That said, the repricing will be limited as the PMI report found rates of inflation of both input costs and output prices softened from April.

Central banks the world over are wary of any signs of renewed inflationary pressures, as highlighted by the Tuesday release of UK inflation figures.

The report noted input costs facing businesses were up sharply again, with the pace of inflation only slightly softer than seen in April.

"Once again, the service sector was the principal source of inflationary pressure, with input costs rising rapidly. That said, the rate of services input price inflation eased to a three-year low," said S&P Global.