Time will tell

Today's news headlines:

  • ‘Europeans scramble to work out what they can do about Iran’. The killing of Iran’s second most powerful figure has prompted Iran to withdraw commitments to the nuclear deal agreed by world leaders. Europe will try to find a diplomatic solution having fought a lonely campaign to keep the agreement alive ever since Trump withdrew the US from the deal in 2018. (Bloomberg)
  • ‘Boris Johnson to seek fast-track EU trade talks’. Boris Johnson is expected to urge European Commission President, Ursula von der Leyen, to open trade negotiations within weeks after she expressed ‘serious concerns’ about Johnson’s December 2020 deadline. Johnson has repeatedly insisted there will be no extension to the transition period. (Financial Times)

A tale of two cities 

The start of every month features the release of the forward-looking Purchasing Managers’ Index (PMI) series of indicators, which have shown a widening divergence in outlooks for sectors of the EU. 

Manufacturing has been in the doldrums for some time now, commensurate with a decline in business investment tied to geopolitical risk and economic uncertainty. Over the past year particularly, the economic slowdown has been pronounced, but some indications towards the end of 2019 hinted at a bottoming. If Purchasing Managers’ Index data is any guide, that hasn’t materialised quite yet. The EU Manufacturing series of PMI’s has seemed to hit a steady contractionary level around 46.0 (50.0 is the no-change, neutral level) which hints that conditions continue to deteriorate.

The EU Services PMI series is a different story altogether. Largely due to improving employment levels over the past six years, the service sector of the EU economy has also remained resilient. Although it’s a slower pace of improvement versus 2017-2018, last years economic deterioration (particularly in manufacturing) has only had a minor hit on the Services PMI data. Unfortunately, the Eurostat Eurozone Year-on-Year Employment reading seems to have topped out at the end of 2018 and more materially decelerated in the past several months. This might presage a convergence of manufacturing and service sectors once more, but it doesn’t say which will change its tune in the months to come. Will decelerating employment bring the services survey into contraction, or will manufacturing rebound buoying employment? Only time will tell.

Bottom line: Conventional thinking suggests a reduction in uncertainty should result in improving manufacturing conditions, except geopolitical risk has not reduced. The US and China are indeed signing a limited trade deal, but then again, Trump has just escalated a long-standing conflict with Iran. Moreover, he has emulated his republican Presidential predecessors and acted unilaterally, which suggest this episode might become even more complex when the facets to this issue grow.
 

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GBP/USD

Cable ended last week fighting the 1.31 level and opens London trading this week below the big figure. The pair risks moving further lower if US-Iran tensions prompt investors to flock to the safe-haven US Dollar. Today’s UK and US Services and Composite Purchasing Managers’ Indexes could provide some short-term volatility and may cause the pair to test the 1.31 level again.

GBP/EUR

The pair ticked lower towards the end of last week, following a New Year’s Eve rally, and is supported by the 1.17 level as we enter the first full week of 2020. Today’s UK and Eurozone data may provide some direction for the pair in the short-run which currently trades at its 50-daily moving average of 1.1720. This level could provide support or resistance depending on which way today’s economic data turns.

EUR/USD

The common currency closed last week above its 200-daily moving average, having dipped below the level on Friday. This level, which currently stands at 1.1143, could provide strong support for the pair today as a slew of Eurozone data is released this morning. Alternatively, the US Dollar may be the driving force for the pair today as markets digest escalating US-Iran tensions.