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Osborne explains why the Pound is performing well against the US Dollar despite a poor manufacturing PMI
Scotiabank reports CAD stability with a positive technical outlook, despite a slight decline caused by the rise of the USD.
The Canadian Dollar (CAD) has seen a small dip, mostly due to a slight rise in the US Dollar (USD). The USD/CAD risk reversal pricing indicates changes, with the 3-month riskies hitting their highest premium for USD puts since 2009.
Bank of Canada Governor Macklem and Finance Minister Champagne are expected to discuss key domestic issues like inflation and interest rates after the Banff G7 meeting. Recent core inflation data for April shows a June rate cut is unlikely, and market expectations for rate changes may also decrease.
USD/CAD Resistance Levels
The USD/CAD pair has slightly recovered from a recent low, but broader indicators still suggest a bearish outlook for the USD. Technical analysis identifies a resistance level around 1.39, with pressure forming near the 1.3745/50 support zone. Bitcoin followers are cheering a new high price, surpassing $110,000 for the first time. Retail sentiment is improving, but institutional investors are cautious due to uncertainties like trade tensions and US debt issues. The Canadian Dollar has weakened a bit, responding mainly to a stronger US Dollar. The increase in the USD/CAD exchange rate is notable, particularly the rising sentiment indicators. The 3-month risk reversal shows the premium for USD puts rising to levels not seen in 15 years. This indicates that those hedging or trading with derivatives are willing to pay more to protect against or take advantage of declines in the pair. This shift suggests a growing belief that the current strength of the greenback may be temporary or overstated due to broader concerns. Governor Macklem and Minister Champagne are expected to comment after their international discussions, focusing on domestic inflation and interest rates. The April inflation data, especially the core numbers, did not decline as expected, making a June rate cut less likely. There’s a belief that the central bank will not rush to ease unless there are clear signs of weakening price momentum. This might limit CAD’s downside in the short term.Bitcoin Market Dynamics
The USD/CAD pair rose slightly from a tested zone but is not yet seen as a trend shift. Resistance remains strong, particularly around the 1.39 level, where previous rallies have stalled. Below that, the 1.3745/50 area is providing current support; a drop through there could lead to extended movements over several weeks. In a different scene, Bitcoin has reached a new historical peak, going over $110,000. This rally is widely celebrated, mainly among retail investors. However, larger players are more cautious, concerned not just about the price changes but also about broader instability like trade issues and US fiscal management. This difference in sentiment—retail enthusiasm versus institutional caution—is important to monitor, especially for those considering trades focused on momentum or volatility. The expectation continues to show potential upside, but enthusiasm from retail investors hasn’t translated into increased activity from large accounts. This suggests that any sharp price moves could be less stable and quickly reverse if economic policies or data shift. Looking ahead, there are many factors to consider—comments on interest rates, inflation reports, and positioning risks. Volatility sellers may need to be more selective, as underpriced risks could change values quickly. Create your live VT Markets account and start trading now.Weak May PMI data reinforces the RBA’s dovish stance, leading to a decline in AUD/USD
The Australian dollar is facing challenges as weak May PMI data raises expectations for interest rate cuts from the Reserve Bank of Australia (RBA). The AUD/USD pair is struggling to stay above the key 200-day moving average of 0.6450.
Australia’s composite PMI has dropped 0.4 points to a three-month low of 50.6. The services PMI has also decreased by 0.5 points to a six-month low of 50.5. Meanwhile, the manufacturing PMI remains steady at 51.7.
Market Expectations
RBA cash rate futures show that the market anticipates a total rate cut of 75 basis points, targeting a rate of 3.10% over the next year. Keep in mind that this financial data carries risks and should not be taken as investment advice. The Australian dollar reacted negatively to the recent Purchasing Managers’ Index (PMI) figures. A composite drop to 50.6, while it seems small, indicates a potential shift in momentum due to its proximity to the neutral 50 mark. The decline in services suggests a slowdown in Australia’s main economic sector, while manufacturing’s stability at 51.7 offers limited comfort, especially as overall economic data weakens. Attention is now strongly focused on the Reserve Bank’s next moves. With futures implying three rate cuts totaling 75 basis points to reach 3.10% over the next year, this explains the selling pressure on the Aussie dollar. This has left the AUD/USD pair struggling to hold above its 200-day moving average of 0.6450. For those tracking long-term trends, the inability to regain this level could lead to more significant changes.Shift in Economic Signals
RBA Governor Lowe had suggested a tough stance on inflation, which had earlier supported the currency. However, with softer economic signals coming in, any previous hawkish outlook is fading. Futures markets are already indicating a more accommodative stance. This situation presents a clear play for relative value. As the Federal Reserve adopts a cautious approach with strong US data, the differing interest rate paths don’t support the Australian dollar. One side signals cuts, while the other’s future direction remains uncertain. In the short term, the AUD/USD pair’s movements will likely reflect its technical levels rather than broader macroeconomic shifts, as most immediate data has already influenced expectations. However, we should not overlook upcoming inflation and employment reports, as these will directly impact futures pricing and, in turn, affect how the dollar performs against other major currencies—especially if any new surprises occur. The strength or weakness of the Aussie dollar isn’t solely about domestic figures; we must also consider China’s demand, which is crucial for Australian exports. Any positive revisions or stronger-than-expected Chinese activity could temporarily counteract the monetary policy outlook. Yet, until the price consistently breaks through key averages, long-term trend followers may not pursue reversals. The technical landscape feels more precarious than directional. Short-term volatility may present selective opportunities for momentum traders, but caution is warranted when conviction is lacking. Ongoing expectations for interest rate cuts suggest that short-term yields in Australia could decline further. This pressure on the Australian dollar intensifies, especially against currencies with tighter or steady policies. Relative rate trends matter, and currently, divergence appears to be hindering the Aussie. In this environment, data can trigger movements more than guide them, as initial reactions may be heightened by fragile positioning rather than fundamental strength. We must stay vigilant for significant responses to even slightly unexpected data. This means keeping a close eye on the headlines and monitoring how futures adjust and liquid flows react around support levels. Create your live VT Markets account and start trading now.USD/JPY declines as the Bank of Japan shows caution amid rising Japanese bond yields
After the US and Japan reaffirmed their currency policies without addressing foreign exchange levels, USD/JPY briefly increased but then fell. At the same time, yields on Japanese government bonds have been rising, especially at the longer end.
A Bank of Japan board member acknowledged recent changes in yields but did not find them unusual. The Bank is cutting its Japanese government bond purchases by about ¥400 billion every quarter, with a review scheduled for June 2025.
Japan’s Economic Data
Recent economic data shows that Japan’s private sector shrank in May. The composite PMI fell to 49.8, the services PMI decreased to 50.8, and manufacturing PMI slightly rose to 49.0. Despite the drop in private sector activity, the swaps market expects a 50 basis point increase in BOJ rates to 1.00% within two years. No official recommendations are given, so individuals should research thoroughly before investing. Overall, it’s clear that Japanese policymakers, while hinting at small changes, are not likely to move the currency markets significantly with just their statements. After the joint statement from Tokyo and Washington, which avoided discussing exchange rates, USD/JPY initially rose. However, this increase was short-lived, fading when it became clear there were no direct actions linked to the statement. This reflects a familiar pattern: commitments to existing frameworks, but without new actions. Bond markets are adjusting their expectations. Yields across Japanese bonds, especially longer-term ones, are gradually rising. This is occurring even as the BOJ slowly reduces its support for government debt. The central bank’s decision to cut JGB purchases by about ¥400 billion each quarter—subject to review next year—seems like a cautious move to restore market stability. This approach is less about timing policy changes and more about understanding the system’s ability to handle pressure over time. The rise in yields suggests a preparation for slight policy adjustments rather than a major shift.Softening Economic Outlook
One BOJ board member noted the rise in domestic yields but quickly added that these changes are not unusual compared to historical data. This is an important point. The BOJ appears to be addressing fears of market dysfunction or reckless selling. However, the broader economy presents challenges. May’s PMI data reveals that Japan’s private sector activity has fallen below the 50.0 mark, which indicates contraction. The services sector is barely above water at 50.8, while manufacturing is still below at 49.0. The composite PMI dropping to 49.8 suggests that consumption and production might weaken further if confidence continues to falter. This situation limits the BOJ’s ability to act decisively on tightening, despite what swaps pricing suggests. Nonetheless, swaps traders have raised their expectations. The market now believes that the BOJ could increase its policy rate to 1.00% within two years, up from 0.50%. This is significant not because it signals immediate action but because traders are looking beyond current weak data to focus on long-term yield pressures and policy normalization. They don’t believe that slow growth will necessarily stop tightening measures. From our perspective, these conditions present opportunities, but only if approached carefully. Forward curves, especially in interest rate derivatives, are indicating a slow but steady policy shift. This implies that near-term rate movements are unlikely to be dramatic, but there could be value in positioning for higher medium- to long-term rates. It’s essential to observe how the BOJ handles its July meeting, focusing on the magnitude and tone of bond purchase adjustments. Additionally, pay close attention to any indications about inflation trends and wage pressures, as these will be crucial for determining when the next rate hike might occur—not just public statements, which are currently cautious. In summary, the contrast between weaker economic data and stronger rate expectations highlights a balancing act in Japanese financials. Entering and exiting these markets requires a clear understanding of central bank intentions and the subtle pricing shifts happening underneath. Create your live VT Markets account and start trading now.Euro weakens during European trading, causing EUR/USD to drop near 1.1300 after weak PMIs
Russian-Ukrainian Tensions Affecting the Euro
US President Trump stated that Russian leader Putin is unwilling to end the war, which negatively impacts the Euro. Trump’s changing views on the Ukraine conflict have been noted, but he did not provide a timeline for possible peace talks. The expected interest rate cuts from the European Central Bank in June are also weakening the Euro. The President of the Bundesbank mentioned progress in US-European trade discussions, but this has not helped the falling Euro. The EUR/USD exchange rate is dropping as the USD recovers, aided by the House Rules Committee’s approval of a new tax bill, which raises concerns about US debt. Federal Reserve officials suggest keeping interest rates steady amidst uncertainty in the US economy. The EUR/USD has some technical support around the 20-day EMA near 1.1240, with resistance at the April 28 high of 1.1425 and key support at 1.1000. The PMI index’s decline indicates a downturn in Eurozone business activity.Current Market Trends and Strategic Insights
The recent movements in EUR/USD reflect more than just short-term changes; they are a response to growing macroeconomic pressures. Latest PMI figures from the Eurozone fell below 50 again, indicating a contraction. The services sector, a previous source of growth, is now weakening and potentially reversing. This raises concerns that the Eurozone recovery is stalling. As a result, the Euro has weakened significantly. Market players are reassessing their previous optimism and expectations for ECB actions. The chances of interest rate cuts beginning soon have increased, as data showing slow growth leaves little room to wait. Lagarde and her team are now under pressure to act. The market is adjusting, showing more certainty about a change in policy. Geopolitical tensions—while not new—are also influencing market sentiment. Comments from the previous US administration about stalled diplomacy in Eastern Europe have caught attention. The perception that peace is far off impacts market reactions more than the conflict itself. Meanwhile, the dollar is gaining strength, driven not only by interest rate expectations but also by renewed focus on fiscal concerns in Washington. A new tax proposal has cleared the committee stage, but its wider implications are still evolving. The dollar benefits from this short-term confidence as Federal Reserve officials remain cautious about loosening monetary policy. Technically, EUR/USD has found support near the 20-day moving average, but this support is not robust against broader pressures. Pricing for short-term options shows increased interest in protecting against downside risks, suggesting less confidence in a quick recovery. Traders watching the 1.1240 level should remember that the strong psychological support at 1.1000 defines the lower range. A break below this level, confirmed by volume and momentum indicators, could lead to a longer decline. On the upside, 1.1425 is a significant resistance point, but it seems far unless economic conditions improve. What stands out is not just the Euro’s fall or the dollar’s rise, but the context driving both. The market is facing multiple pressures—policy changes, economic data, and geopolitical uncertainty. Traders should regularly reassess their exposure to these dynamics as new information comes in. Timing is especially critical now, with options pricing in higher hedging costs ahead of important central bank meetings. Short volatility strategies may yield better returns if markets are overly priced, but until implied and realized volatility align, a neutral or cautiously bullish position on the dollar seems wiser. The trading ranges may remain limited if no new catalysts arise, but significant fluctuations remain possible due to current sensitivities to minor sentiment changes or unexpected data releases. Create your live VT Markets account and start trading now.Boris Vujčić says Eurozone growth is positive, though low
European Central Bank policymaker Boris Vujčić mentioned that the Eurozone’s growth is positive, though low. He expects inflation to approach the 2% target by the end of 2025 and to reach it by early 2026.
These comments did not significantly impact the Euro. The EUR/USD rate was down 0.19%, near 1.1310, at the time.
Forward Looking Statements
This information includes forward-looking statements that involve risks and uncertainty. The data provided is for informational purposes and should not be considered investment advice. Readers are encouraged to do their own research before making financial decisions, as markets can be risky. Neither the authors nor any other sources guarantee the information is completely accurate or free from errors. When Vujčić said that Eurozone growth is low but positive, he acknowledged that while the economy isn’t shrinking, it’s not expanding fast enough to prompt the European Central Bank to make sudden changes. The forecast of reaching the 2% inflation target by late 2025 implies that the ECB doesn’t feel the need to tighten monetary policy soon. This suggests a cautious, wait-and-see approach regarding inflation stabilizing at a manageable rate. Despite this relatively gentle stance, the EUR/USD exchange rate slightly dipped by 0.19% on the day of the comments. This small decline indicates that markets did not see the policymaker’s remarks as a significant reason to reassess the Euro’s strength against the Dollar. Traders may have already factored in similar expectations based on recent economic indicators and ECB comments.Interest Rate Markets
For those interested in rate derivatives – like forward rate agreements, interest rate futures, and swaps – these comments act as a reference point. With inflation expected to meet the ECB’s target in about two years, there’s no rush for tighter conditions. This timeline shapes the expected path of policy rates, likely keeping short-term rates stable. Medium-term pricing might begin to show a gentle increase, especially if data supports the ECB’s outlook. In the interest rate markets, the near-term OIS curve in Europe is flat, suggesting that participants anticipate few immediate changes from the central bank in the coming quarters. Instead, there may be gradual adjustments priced in for the future. Consequently, volatility in shorter maturities appears low. Our challenge lies in forecasting further out on the curve, as inflation risks, wage growth, and energy prices weigh heavily. Recently, there’s been a rise in using options structures to hedge both sides of the rate path, as some desks prepare for fluctuations due to diverging economic data. We should consider adjusting spread trades between Euribor and short Sterling or SOFR based on evolving transatlantic expectations. These decisions depend not only on the ECB’s careful approach but also on movements from other major central banks, which may lead to reallocations across portfolios. There are also signs of discrepancies in implied volatility, suggesting that the market sees more uncertainty from late 2025 to early 2026, possibly due to concerns about growth resilience or external shocks. This might indicate that confidence in the baseline inflation path is overly high. A review of cap/floor strategies could be beneficial. In the coming weeks, closely monitoring second-tier inflation data across the region may provide early signs of whether core price pressures are easing as expected or returning – which could lead to risks of spikes at the ends of rate curves. Activities in longer-term payer swaption space often reveal important insights in this environment. Some of these positions are already beginning to extend along the two-year expiry mark, reflecting a mild risk of reacceleration. It’s important to note that while this policymaker is not in the most influential voting group, he still helps shape the overall sentiment in the Governing Council. His tone aligns with the consensus but remains cautiously balanced. This highlights that while there are still inflation risks, the ECB is currently comfortable with its main outlook. We see few immediate catalysts that would significantly change this perspective ahead of the next ECB meeting, especially as recent PMIs have shown neutral results at best. However, future insights from monetary policy accounts or interviews with other Council members may slightly shift expectations. At this point, signals suggest the ECB is satisfied with the current direction, though not entirely convinced the job is complete. This subtle difference is crucial. Create your live VT Markets account and start trading now.Francesco Pesole from ING believes a rise in EUR/USD is inevitable as the euro strengthens.
European currencies are gaining strength as investors move away from US assets. A recent report indicates that the European Central Bank may have asked banks to test their US dollar funding requirements.
There are concerns about the Federal Reserve possibly limiting access to emergency US dollar swap lines. While this scenario is not likely, it could accelerate the move away from the dollar.
Potential Movement in EUR/USD
A rise to 1.150 in EUR/USD may be premature without clear signs of economic harm in the US due to tariffs. If the G7 summit does not resolve trade tensions and Treasury markets remain weak, another increase in EUR/USD could happen. Investing carries risks, including the possibility of financial loss. This information is for informational purposes only and should not be considered a recommendation to buy or sell any assets. Always do your research before making investment decisions. What we see is traders reacting to signs of stress in dollar funding markets. When central banks like the ECB request commercial banks to test their risk exposure, it usually indicates that policymakers are contemplating a situation where access to dollar liquidity could become limited. This often occurs during market disruptions or when global funding costs rise. We should also consider that the US Federal Reserve may reduce its emergency dollar swap lines. Although this change is not expected immediately, the discussion around it creates an environment where reliance on the dollar feels less secure. We believe the market is beginning to recognize that alternatives, especially in Europe and partly in Asia, could become more appealing. This doesn’t mean a complete overhaul, but shifts can start when old beliefs about liquidity and access change even slightly.Geopolitical Influences and Expectations
We already see capital flowing back to European assets, made more attractive by tighter real rate differentials and a more synchronized fiscal-monetary environment. This alone doesn’t automatically justify a rise to 1.150 in EUR/USD, but if this trend continues alongside persistent weakness in US Treasuries, the euro could rise further without a crisis prompting it. Looking ahead, much will depend on how the upcoming geopolitical events, especially the G7 summit, affect trade discussions. If officials leave without providing clarity on tariffs or future regulations, we may see another increase in EUR/USD. This would not be due to improved fundamentals in Europe, but rather the ongoing reassessment of risk in the United States. News about tighter dollar liquidity, alongside these developments, would further indicate this trend. Traders appear to view EUR/USD movements as more than just temporary. There’s increased interest in long-term positions, suggesting that they are preparing for more than a brief rally. This indicates that pricing is not just a reaction to current events but is also anticipating potential policy differences or funding changes. Timing is crucial. The current period offers an opportunity to examine carry dynamics and instrument volatility amidst relatively minimal changes. For example, the options market is leaning towards call options, with premiums rising faster than puts. This trend may continue unless the picture for Treasury yields shifts dramatically. In the short term, a smart strategy is to adjust short-dated exposures and monitor how central banks manage liquidity discussions in their upcoming meetings and minutes. If they start discussing stability tools or collateral availability more frequently, it will be significant beyond just foreign exchange. We are closely observing funding terms in Europe, the US, and Japan for signs of stress or implicit support. Ultimately, everything relies on how trade relations evolve, particularly US tariff policies and supply chain issues. If conditions worsen, US real yields may face ongoing pressure, potentially affecting the bond market, which could heighten the necessity for gradual diversification in institutional investment strategies. On a technical note, implied volatilities are still providing good opportunities for directional bets, especially in gamma terms. However, it’s essential to monitor skews for signs of overcrowding, which have started to flatten. This could suggest new risk environments are developing. A steepening skew, particularly in longer-dated options, would require quick adjustments to exposure. As the week progresses, the continuation of this trend will depend on market flows. European data, while not strong, is not declining rapidly enough to interrupt current price movements. Therefore, traders should stay alert to Treasury auctions, communications from the ECB, and any sudden shifts in cross-currency basis markets. Changes in these areas often precede shifts in overall market sentiment and have historically helped us identify turning points in currencies and volatility ahead of the broader market. Create your live VT Markets account and start trading now.The UK’s S&P Global Composite PMI for May was 49.4, exceeding expectations of 49.3
The S&P Global Composite PMI for May is recorded at 49.4, slightly above the expected 49.3. This suggests that the UK’s economic activity is starting to improve, even if it remains just below the growth threshold.
Some sectors are showing strength despite ongoing challenges. Now, we should consider how these trends could affect future monetary policy and the overall economy.
Signs of Economic Stabilization
The May S&P Global Composite PMI score of 49.4, just shy of the 50 mark, indicates that the private sector in the UK is still contracting, but at a slower pace than before. Although this isn’t a strong positive signal by itself, the slight increase from the predicted 49.3 means that some areas of the economy may be stabilizing after a more significant downturn. Manufacturing has helped ease some of the overall decline, and services are not dropping off as fast as initially expected. The 50-point line on the PMI scale is crucial; it separates growth from contraction. While the UK hasn’t made a complete turnaround yet, the rate at which conditions are worsening seems to be slowing. Monetary policymakers will carefully consider this data when deciding on future policies. Bailey and the Monetary Policy Committee may adopt a cautious approach due to ongoing wage pressures and inflation concerns. The closeness of this figure to the growth threshold could lead them to keep rates steady longer than the market might like.Market Positioning Strategy
We should adjust our strategies accordingly. Volatility in short-term forwards, especially rates-sensitive products, is likely to continue. Traders need to be ready for quick changes, particularly if upcoming data, such as CPI numbers or wage growth, clarifies demand trends. Additionally, any improvements in services or business investments could lead to slight adjustments in short-term rate expectations. The immediate concern isn’t just about avoiding a recession; it’s whether policies might be overly restrictive for too long. Threadneedle Street is unlikely to react to just one PMI report. However, a series of reports showing a slowdown could become more significant. This is where our focus lies. From a positioning perspective, this opens opportunities for cautious short-term strategies, especially in contracts sensitive to growth indicators. Each new data release now carries more significance. The likelihood of rate changes is becoming tighter, often resulting in sharper market reactions to even minor surprises. Our focus is not on seeking dramatic shifts but on understanding if a pause in policy might hint at a more dovish stance. If the data indicates a sustained move away from contraction, it could create subtle upward pressure on market rate trajectories. Create your live VT Markets account and start trading now.Germany’s IFO expectations exceeded forecasts in May, reaching a score of 88.9
Germany’s IFO expectations index for May came in at 88.9, exceeding the expected 88. This indicates a positive shift in the German economy.
At the same time, EUR/USD remains above 1.1300, despite a decline in business activity in the Eurozone’s private sector. Traders are now focused on upcoming US PMI data for further direction.
UK Market Outlook for GBP/USD
In the UK, GBP/USD is trading above 1.3400, as the S&P Global Composite PMI improved to 49.4 in May from 48.5 in April. All eyes are on the US PMI figures expected to be released soon. Gold has pulled back from a two-week high, moving to the lower end of its daily trading range. This drop isn’t driven by strong news, and the $3,300 level is key for bullish traders to watch. The upcoming US S&P Global PMI reports are expected to show little change. The Services PMI is likely to stay steady at 50.8, while the Manufacturing PMI might dip slightly to 50.1. Germany’s IFO expectations index of 88.9 for May, above the forecast of 88, signals a slight increase in sentiment among German businesses. This is the highest reading in months, suggesting a possible return of optimism, especially among firms expecting better conditions in the future. Although expectations can be more unpredictable than current assessments, they often precede changes in broader economic indicators. Dismissing these results would be unwise, especially after the challenges faced by Germany’s economy. Generally, any uptick in confidence in a strong economy could lead to reactions—or at least a reevaluation—across related assets. This sentiment might help explain why the euro is holding its ground against the dollar, despite weaker data from the Eurozone’s services and manufacturing sectors. EUR/USD staying above 1.1300 indicates that market participants may be looking beyond short-term struggles or downplaying potential changes in the Federal Reserve’s interest rate decisions, which are a major focus these days. We believe this resilience isn’t coincidental. It suggests that current positioning may already reflect a more subdued near-term European growth outlook, allowing for stable projections to justify keeping long positions—though not necessarily increasing them. Timing is crucial here.UK Economic Momentum
In the UK, the situation is similar. The pound remains strong above 1.3400 after the country’s composite PMI rose from 48.5 to 49.4. While still below the 50 mark that indicates growth, this movement is encouraging. For those monitoring closely, even a small recovery like this can shift expectations about future actions by the Bank of England. More interestingly, the reaction in the FX market suggests investors are responding to the direction of change rather than the absolute figures, indicating a potential shift away from previous pessimism. Gold, however, has declined from recent highs, unable to maintain near the crucial $3,300 level that bulls were eyeing. The drop seems to lack significant news, suggesting technical factors or a natural fading of earlier momentum. Such setups often correct when levels don’t break through convincingly. With real yields steady, there’s little incentive for chasing higher gold prices right now. We are watching to see if demand reemerges near support levels; if not, there may still be downward movement. Now, looking toward the US, the next important data point is the S&P PMI for May. No major surprises are expected. The services component is predicted to stay at 50.8, while manufacturing may see a slight dip to 50.1. If these expectations hold true, it would indicate that growth is stable but not accelerating. The market remains sensitive to these forecasts, and any surprise—no matter how small—could lead to significant volatility, especially in rate-sensitive areas. Any deviation, particularly in the services category, could have greater implications than anticipated. For traders involved in derivatives linked to currencies, commodities, or interest rates, this landscape is tricky. Sentiment is shifting on fine margins—a small change in PMI can shift views significantly. We believe monitoring how implied volatility reacts right after the releases could offer clearer insights than just the numbers themselves. This means focusing not only on the headline figures but also on market reactions: who’s buying, who’s selling, and how the skew is changing. The coming sessions will likely clarify unresolved pressure points, especially as many major contracts remain lightly positioned. Create your live VT Markets account and start trading now.In May, the Eurozone’s Manufacturing PMI rose slightly, but the sector remained in contraction.
Eurozone Manufacturing PMI rose to 49.4 in May, up from 49.0 in April, beating the forecast of 49.3. On the other hand, the Services PMI fell to 48.9 from 50.1, missing the expected 50.3 and marking the lowest level in 16 months.
The Eurozone PMI Composite also decreased, falling to 49.5 in May from 50.4 in April, against an expected 50.7. Despite these mixed PMI results, the EUR/USD remains above 1.1300, but is under some pressure.
The Euro, used in 19 European Union countries, is the second most traded currency worldwide, with daily transactions exceeding $2.2 trillion in 2022. The EUR/USD is the most actively traded currency pair.
The European Central Bank (ECB) in Frankfurt oversees Eurozone monetary policy, primarily aiming for price stability through interest rate adjustments. Higher rates often strengthen the Euro, while lower rates may weaken it.
Economic indicators like GDP, PMI figures, and inflation rates can influence the Euro’s value. If inflation goes above the ECB’s 2% target, interest rate hikes could boost the Euro. The Trade Balance is also an important factor affecting currency value.
Recent PMI readings tell us a clear story: different sectors in the Eurozone are moving apart. Manufacturing improved to 49.4, but it’s still in contraction (below 50). This suggests a slow rebound in production levels, hinting at slightly lower input costs.
However, this small positive note is clouded by the decline in the services figure. A reading of 48.9, down from 50.1, indicates that the services sector is contracting for the first time in over a year. This is significant because services make up a large part of the Eurozone economy, and consecutive weak readings signal softer consumer demand and a potential slowdown in the labor market.
The composite figure of 49.5 adds to this concern. While it’s not a crisis, it shows that the overall economy is cooling. Businesses may become more cautious, expecting tighter financial conditions or lower demand as summer approaches.
The EUR/USD pairing has felt limited effects so far, staying just above 1.1300. This stability suggests that markets are hesitant to make drastic moves.
For those trading derivatives, especially euro-based positions, be aware of the volatility that follows economic releases. The markets are anticipating some weakening in the Eurozone recovery, but the Services PMI miss might shift expectations about European Central Bank actions later this year.
The ECB closely monitors inflation data, but with weaker services data, the focus may shift from price increases to broader economic health. If inflation stays above the 2% target amidst slowing output, the ECB may face tough decisions. Rate hikes could be harder to justify if service activity keeps declining.
The mixed signals—manufacturing improving while services weaken—could increase uncertainty around the Euro. This situation may also influence expectations, not just based on Eurozone developments, but broader global events, including those in the U.S.
Moving forward, it’s essential to keep an eye on upcoming PMI data and updated inflation figures, particularly regional core prints. These will help identify if the softness in services is due to internal demand issues or external trade slowdowns.
Fortunately, liquidity in the euro pair remains strong thanks to its high trading volume. Instruments linked to EUR/USD will likely show predictable behavior regarding short-term spreads, but medium-term trends could change based on unexpected macroeconomic events.
When PMI trends diverge, so can policy speculation. Traders should consider not only how the ECB might respond, but also how fixed income prices might shift with changing balance sheet expectations. The Trade Balance, often overlooked, may regain significance if exports from the Eurozone struggle against international competition due to domestic costs.
In the coming weeks, watch for ECB comments that may confirm or challenge what the markets expect. Traders in options and futures need to evaluate their exposure to potential macro-driven changes influenced by both data releases and shifts in central bank perspectives.
We may be entering a phase where maintaining directional confidence is challenging without strong cross-market support. This means observing not just currency pair movements but also bond trends, cross-currency swaps, and short-term rate futures.
Basic signals like PMI alone often don’t tell the whole picture. However, when combined with inflation data, central bank minutes, and global attitudes towards risk, they can create a macro environment that allows for effective derivative positioning—if timed correctly.
