EUR: PMI surveys provide encouraging signals for the euro-zone economy - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the release yesterday of the latest PMI surveys provided some encouraging signals for the euro-zone economy.

Key Quotes

“The surveys revealed that business confidence rebounded strongly in October rising to its highest level this year. Markit noted that the composite PMI reading was consistent if maintained in the coming months with the euro-zone economy expanding by 0.4% or more in the final quarter of this year. The more forward looking sub-indices also provided an encouraging signal that the improvement in confidence is likely to be maintained. There is little to evidence yet that the euro-zone economy has been negatively impacted by the Brexit vote. For the year as a whole the euro-zone economy remains on track to expand “moderately” this year in line with the ECB’s staff forecast from September of 1.7%.

The ECB will have been pleased as well to have seen further tentative evidence that inflation pressures are beginning to pick-up. The composite output price sub-index increased by 0.5 point to 50.5 in October reaching its highest level since August 2011. The positive survey results could add to nervousness amongst market participants heading into the ECB’s upcoming policy meeting in December when it is expected to make a decision over the future of their QE programme.

We still believe that it is too early for the ECB to consider tightening monetary policy and expect the QE programme to be extended beyond March by further six months at the current purchase rate of EUR80 billion per month. If we are correct then the euro should continue to trade on a weaker footing heading into next year. However, it is reasonable to assume that the ECB could deliver a taper signal later next year if the euro-zone economy continues to build on tentative signs of progress so far. The trading environment would then likely start to become more supportive for the euro increasing upside risks for the euro in the second half of next year.”