EUR USD (1.3145) The euro reacted to a worse-than-expected Italian manufacturing PMI (43.8) number yesterday and plunged. While the number was certainly poor, what triggered the sharp reaction in the euro was that it was perceived as a surprise. This is puzzling because the eurozone flash PMI had already painted a nottoo- rosy picture of the manufacturing activity in the eurozone – including Italy – back in April. The second surprise for the euro was the ADP data which seemed to reverse expectations about the US economy that emerged after the favourable ISM-index from the previous day. It unsettled many euro investors and pushed the single currency to the day’s low. We reckon that technical stops were triggered below $1.32 mark and this helped to drag the euro down. Thereafter, around current levels the EUR/USD saw higher trading volumes, but the price moved only sideways, suggesting the market was dominated by polarised opinions. Of course, there were enough reasons for the euro bears to sell yesterday (Spain recession, worsethan- expected German PMI and record unemployment in the eurozone) However, what kept the euro buoyed perhaps were those who are now anticipating a policy response, starting with Mario Draghi at today’s ECB meeting. One wonders what this might be, given that nobody is forecasting a rate cut, and we have our reservations about the feasibility of further LTROs? The euro slid under our risk limit yesterday. Nevertheless, while it holds above 1.2960 we still see it as broadly stable. An initial supply point now comes in at 1.3235.
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Deutsche Bank