There have been some incipient signs of a global economic slowdown. With the US economy expected to stay buoyant in the coming months, that could mean the dollar stands to regain momentum. There is particular concern over Europe, with Germany posting negative growth last year. On top of that, the shared economy is now facing a speed bump in the form of higher trade risk with Asia over the Red Sea Crisis.
One of the first indications of a slowing (or speeding up) of the economy is in the PMI figures. Which is why the flash results for this data series this time around could get extra attention as investors try to gauge what will happen to the global economy. Europe and the UK seem to be among the most vulnerable at the moment. But increased shipping costs and slowing global demand could also mean commodity currencies fall as well.
Europe was expected to experience an economic rebound in the new year, after being under pressure through all of 2023. The thought was that inflation would come down and the ECB would look to ease, and that would allow the shared economy to experience some degree of updraft. (The word “bounce” implies too much dynamism to describe Europe’s economy at the moment.) The threat of inflation remaining higher for longer, due to higher shipping and energy costs, could be a larger counterweight to growth than in other economies. The UK barely escaped a recession last year, and is in a similar position.
This puts the ECB in a quandary: does it keep rates higher to curb inflation that isn’t caused by monetary expansion? Or does it let inflation run hot, but cuts rates to support the economy? The later option could hurt the bank’s credibility and require even higher rates to curb inflation later. Letting rates stay high doesn’t provide much upside for the Euro, as the shared economy would likely underperform. Cutting rates would naturally weaken the Euro as well.
The US, on the other hand, stands to be one of the larger beneficiaries of the current climate. Relatively little trade goes through the Red Sea, and re-routing from Asia across the Pacific isn’t as large of an increase in cost/time as it is for Europe-destined cargo going around Africa. With higher energy prices from the Middle East, Europe would likely have to import more LNG and crude from the US and Canada. That could see both of their dollars standing strong. Japan, which trades primarily with the US and China, is largely unaffected by the situation in the Red Sea. The yen is already poised for growth as the BOJ is expected to move out of ultra easing.
Therefore, traders are likely to be very interested to see if there is any disconnect in growth rates between major economies. The Euro likely depends on a return towards expansion in its manufacturing indicators, while for the greenback, manufacturing expansion would likely need to be maintained.
If German Flash Manufacturing PMIs are closer to 50 than expected, it could help rebuild some confidence in the Euro. France would also have to follow suit. UK Manufacturing PMI is expected to remain slightly higher than the Euro Area, but still stay in contraction. While in the US and Japan, the expectation is for manufacturing PMI to reflect a cooling in the market.
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- Source: https://www.orbex.com/blog/en/2024/01/global-flash-pmis-and-the-chance-of-risk-on
