Euro Plunges on 7-yr Low Mfg. Activity in the Eurozone

Euro Plunges on 7-yr Low Mfg. Activity in the Eurozone
April 2, 2020


The euro dollar plunged against the yen yesterday after data from the IHS Markit indicated contraction in the Eurozone manufacturing activity at the quickest rate in seven years as COVID-19 had a severe negative impact on factory orders, jobs, production output, and sentiment. The decline was also aided by a steep rise in coronavirus related deaths in the Eurozone. As uncertainty increases, investors continue to seek safe-haven assets such as the yen, which offer reasonable protection against risk. Lower-than-anticipated fall in Japan’s large business sentiment (Tankan survey) also fueled the euro dollar’s decline. In the past 24 hours, the EUR/JPY pair declined from a high of 118.87 to a low of 116.95.

According to IHS Markit, the Eurozone final manufacturing PMI (purchasing managers’ index) declined to 44.50 in March, from 49.20 in February. The reading also missed a flash estimate of 44.80. Economists had anticipated a reading of 44.70. Notably, the reading has remained below 50 for fourteen successive months and recorded its lowest level in 92 months. A reading above 50 indicates expansion, while a reading below 50 indicates contraction.

The survey indicated that COVID-19 linked closures caused a decline in output and orders this month. The sluggishness in manufacturing output was the highest since April 2009. Likewise, fresh orders declined to a level unseen in almost 11 years.

To free working capital, companies resorted to trimming inventories of finished items. Additionally, manufacturers slashed their employment levels at the quickest rate in more than a decade. There was a significant rise in input expenses due to the decline in raw material costs. Output costs also declined to the highest level in four years.

Mirroring worries over short- and long-term effects of the COVID-19 pandemic, business sentiment recorded its most significant monthly decline.

Commenting on the data, Chris Williamson, a chief business economist at IHS Markit, said: “The concern is that we are still some way off peak decline for manufacturing.”  

Country-wise, German output declined at the quickest rate in nearly 11 years, primarily due to a sharp rise in COVID-19 cases. The manufacturing PMI reading was 45.4 in March, missing economists estimate for a reading of 45.60. The flash estimate was 45.70. Last month, the reading hit a 13-month high of 48.

Italian manufacturing PMI also recorded an 11 year low PMI reading of 40.30 in March, missing economists’ prediction of 41.10. The flash estimate was 48.70.

Likewise, the French final manufacturing PMI hit the lowest level since January 2013. However, the final PMI reading of 43.20 for March was slightly better than the flash estimate of 42.90. Economists did not anticipate any change in the final figure.

Spanish Manufacturing PMI deteriorated to its lowest level in seven years. The final manufacturing PMI reading was 45.70 for March, down from a flash estimate of 50.4. Economists had forecast a reading of 44.0.

Notably, the data published by Destatis indicated that German retail sales rose 1.2% m-o-m in February, from 0.9% in the earlier month. Economists had anticipated a mere 0.1% growth in retail sales for the reported period.

Similarly, the Eurozone unemployment rate inched downwards to 7.3% in February, from 7.4% in the earlier month. Economists had anticipated the jobless rate to remain unchanged. Notably, it is the lowest unemployment rate recorded in the Eurozone since March 2008.

In Japan, large enterprises (manufacturing) reported a sharp drop in business sentiment. The Bank of Japan’s quarterly Tankan Survey showed a diffusion index score of -8 in the first quarter of 2020, from zero in the previous quarter. However, the reported reading was better than economists’ expectation for a decline to -10. The non-manufacturing index declined to a reading of 8 in 1Q 2020, from 20 in the earlier quarter. Economists had anticipated a reading of 3 for the reported period.

The small manufacturing index reading was -15, surpassing forecasts of -20, and drop from -9. The outlook reading was -29, a decrease from -12, and missing forecasts for -25. The small non-manufacturing index reading was -1, surpassing forecasts for -10 but a sharp decline from 7. The outlook reading was -19, missing predictions for -15 and decrease from 1.

The outbreak of the coronavirus has resulted in the loss of over 30,000 lives in Europe, with over 75% of deaths recorded in Spain and Italy. With confirmed cases rising to 458,601, Europe remains the hardest hit continent.

The weak manufacturing PMI and concerns over coronavirus outbreak have forced investors to invest in safe-haven assets such as the yen. Therefore, we can expect the EUR/JPY pair to remain range-bound with slight bearish bias in the short-term.

The historical price chart indicates that the EUR/JPY pair is making new lows after failing to stay above 118.90. The next support is anticipated only near 116.30. Additionally, the stochastic indicator is also in the bearish zone. Therefore, we are anticipating the currency pair to move down in the short-term.

EUR - technical analysis - 2nd April 2020

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Janine is our editor for related stock market news. Andrew and Janine will be focusing on providing the latest trends and where the next hit could be

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