Looking to Sell EUR/USD Close to 1.10, As Eurozone Manufacturing Remains in Deep Contraction

Posted Monday, July 3, 2023 by
Skerdian Meta • 2 min read

Manufacturing has been showing considerable weakness all over the globe throughout this year, with the activity being in recession in the Eurozone. The latest report from HCOB’s purchasing managers’ index survey revealed another deterioration in the manufacturing sector in the block during June.

The Eurozone Manufacturing Purchasing Managers’ Index (PMI) declined to 43.6 points, falling short of market expectations of 44.7 points, also lower than the May figure of 44.8. This reading represents a 3-year low for the index. Besides that, the HCOB Eurozone PMI Composite, which considers both manufacturing and services sectors, decreased to 50.3 points in June which is just above contraction, compared to market expectations of 52.5 points and the previous figure of 52.8 points. This index reached a five-month low.

These results indicate a weaker-than-expected performance in the Eurozone manufacturing sector, raising concerns about the overall economic outlook for the region. Today we had the final manufacturing reading from the Eurozone for June, which also came in pretty weak. EUR/USD made quite a comeback on Friday, surging around 100 pips, although that was due to USD weakness as core PCE prices showed another decline, confirming that inflation is falling in the US. But, with the Eurozone economy slowing further, the downtrend will likely resume in this pair.

Eurozone Final Manufacturing Reading for June

June final manufacturing PMI 43.4 vs 43.6 prelim
May manufacturing PMI 44.8

The manufacturing output index falls to an eight-month low as subdued demand conditions are weighing. Other things of note, we are seeing manufacturing employment decline for the first time since January 2021 and business confidence dipped to a seven-month low. HCOB notes that:

“Eurozone manufacturing production contracted for the third month in a row in June, according to the PMI output index, with the rate of decline accelerating and pointing to a worsening of factory conditions. New orders also fell at a faster rate, which further increases the likelihood that industrial production, which contracted by 0.9 % month-on-month in the first quarter according to Eurostat, will drop again in the second quarter.

“There is growing evidence that the capital-intensive industrial sector is reacting negatively to the ECB’s interest rate hikes. Companies surveyed reduced their headcounts for the first time since January 2021, and purchasing activity declined at one of the worst rates on record. Cuts to sales prices for the second month in a row come as no surprise given the weakness in demand and rapid rate of cost deflation.

“The downturn is visible across the board geographically as all four of the biggest eurozone countries remained in contraction in June. In terms of new orders, the weakness in demand is most pronounced in Germany, followed by Italy and France.

“Delivery times are continuing to normalize, with the corresponding index signalling that since February, companies in the currency union are receiving their goods more quickly than in the previous month. While is seems as if companies do not complain so much anymore about delivery times, shortages of materials are still a lingering issue. According to DG ECFIN, for example, around 28% of companies in the eurozone complained of a shortage of materials in the second quarter – by 2019, this figure had averaged just under 7%.”