The euro continues to decline against the US dollar for the second day in a row by 0.2%, reaching its lowest level in nearly two weeks. 1.08313.
The euro’s decline is due to the weaker-than-expected performance of private sector activities in the eurozone, coupled with the widening yield gap between treasury bonds and regional bonds to the highest level in twenty days. This decline persists despite the temporary recovery in consumer sentiment in Germany.
We witnessed a number of S&P Global reports for service and manufacturing PMI reports for Germany, France, and the eurozone, which confirmed the continued weak performance across the region, especially its largest economies. Today we also witnessed a faster than expected decline in German consumer pessimism according to the GfK Consumer Climate Index.
This weak performance of economic activities led to a decline in bond yields of countries in the region. This, in turn, caused a further widening of the yield gap between US Treasury bonds and regional bonds. The spread between 10-year US Treasury bond yields and their German equivalent reached 1.822%, the highest level since last July 3.
The continued weak performance of the region’s economy would push the yield gap further on favour of US treasuries, and this may constitute a key negative factor for the euro in the short term.
While the euro was unable to benefit from the near certainty about the possibility of the Federal Reserve cutting interest rates next September and the possibility of a cut again in November or December, due to the continued disappointing economic performance and the high yield gap.
The state of political uncertainty also in the US after the rollercoaster of the presidential race would restore Treasury yields to their upward trend, and this would naturally provide more support to the dollar at the expense of a weaker euro. The attempted assassination of Donald Trump, the withdrawal of Joe Biden, and the optimism around Camilla Harris as an alternative candidate for the Democrats have brought the presidential race into successive, very sharp turns.
Today’s data show that the decline in German consumer pessimism in July was prompted by a substantial rise in income expectations and some improvement in willingness to buy, according to the GfK Consumer Climate Survey. However, Rolf Buerkl, a consumer expert at the Nuremberg Institute for Market Decisions (NIM), believes the sustainability of this recovery in sentiment is questionable, as it may be due to the momentum generated by the recent European Championships held in Germany.
However, private sector activities in Germany show a different reality in the same period and tended to contract due to pressure on manufacturing activities, according to S&P Global report for July. Meanwhile, this poor performance of manufacturing activities came with a contraction in new orders at one of the paces in three months, in contrast to the growth of new orders in services for the fourth month in a row. Also, sentiment in the services sector has improved in contrast to the low sentiment in the manufacturing sector, which is at the lowest levels in four months. While the reading of both PMI indices for the two sectors was below expectations.
This weak performance of manufacturing activities is similar to that in France, with contraction continuing there as well, with difficult demand conditions. However, service activities have unexpectedly renewed their slight growth in France for the first time since last April, despite the decline in demand, while some of this growth may be due to the Olympic Games that were held there, according to the report.
With such poor performance in each of the eurozone’s major economies, it is not surprising that activity across the region recorded its worst performance in months. Manufacturing activities contracted faster than expected and services growth was less than expected. While new orders fell for the second month in a row, business confidence reached its lowest level in six months, in addition to fading employment momentum. As usual, manufacturing activities led the weak performance of activities as production fell to its lowest level since the beginning of the year. While weak export orders explain part of the weak demand conditions as well. Despite all this, companies remained optimistic about the future, even if this optimism was at its lowest level in six months.
Today, we also await S&P Global purchasing managers’ reports for the US for the same period. While the performance of activities there to meet expectations would deepen the euro’s losses and widen the gap in economic performance and bond yields, of course.
