Terrible PMI data yesterday was not enough to keep the EURUSD pair at the lows. While it did fell from 1.19 to 1.18, the pair bounced overnight on the back of strong performance from the U.S. equities that sent the dollar lower.
However, one cannot ignore the abysmal PMI data in the Eurozone. The PMI is a diffusion index – a survey. For this reason, it often gives contradicting signals, in the sense that it shows a steeper contraction of a sector than it really is. Or a stronger expansion than the reality is.
Yet, yesterday’s data makes one wonder when and how the Eurozone will recover from the downturn generated by the COVID_19 pandemic. The Flash Eurozone PMI Composite Output for November came out at 45.1 – a six-month low; the Eurozone Services PMI out at 41.3 – another six-month low.
Back to Deep Recession
Many have predicted such a move back to recessionary conditions. Yet, the harsh numbers are hard to digest.
Take the services data, for example. At 41.3 in November, it follows the 46.9 release in October. Both releases are well below the 50 level that marks the expansionary/contractionary boundary.
Because many of the European economies are in some sort of lockdown, the data is not surprising. What is surprising is the dive to 41 in services and the prospects ahead. While vaccine news is good, there is still a long way to go until normality. Until then, a different Christmas awaits European families. One with limited travel, with restrictions of all kinds – and with higher unemployment and money to spend.
In contrast, the data out of the United States keeps coming out better than expected. Yet, the USD does not reflect the positive data – only the stocks do.
It shows how difficult it is to interpret the currency market and the potential effects of economic data on a currency’s movement. Extreme and unconventional monetary policy altered the basic fundamental principles so much that the market lives in its own world.
Indeed, a disconnect from reality is something that financial media discussed multiple times this year. For once, the stock market looks disconnected from economic reality.
However, it is not the first time when such a thing happens. It just so happens that the markets are stretched, and some trades require more time to unfold. As we come closer to the end of the trading year soon, expect some more surprises in the short time left until 2021.