Dollar climbs as economic growth indicators show manufacturing slowdown

Manufacturing bosses report slowing demand as cost of living weights on the consumer – Photo: Shutterstock

The dollar returned close to its recent 20-year high level on Thursday as keenly-followed economic indicators suggested UK and eurozone manufacturing activity was slowing at a greater pace than expected.

The US dollar index (DXY) gained 0.4% to 104.56, while the pound (GBP/USD) slipped 0.5% to $1.2205 and the euro (EUR/USD) fell 0.5% to $1.0507 after purchasing manager’s indexes in both regions softened by more than expected.

Investors and traders, as well as central bankers and corporate economists and risk managers follow the monthly purchasing manager surveys closely, as they contain forward-looking elements that often presage developments in the real economy and therefore aid business planning and investment strategy.

US dollar index (DXY) price chart

What are purchasing managers’ indexes – PMIs?

Purchasing manager surveys compile anecdotal data from senior executives across industrial sectors such as manufacturing, services and construction, on whether business conditions are getting better, staying the same or worsening.

They also quiz execs on what they expect conditions to be like in the months to come, answering details on staffing, order books, inventory levels, production rates, supplier deliveries and input costs such as raw materials and parts.

They are, therefore, useful on-the-spot and forward-looking indicators on a country’s labor market, economic growth and inflation levels.

The data collected from the surveys are compiled to form an index – the purchasing manager’s index, or PMI – which is numbered from 0-100, with 50 being the base level: an index above 50 indicates expanding economic activity, while below 50 shows economic contraction.

Let’s examine this morning’s surveys for the manufacturing and services sectors in the eurozone and the UK in more detail:

Eurozone PMI preliminary readings for June

Eurozone manufacturing PMI – June

Eurozone services PMI – June

Headline PMI: 52

Headline PMI: 52.8

Last month: 54.6

Last month: 56.1

Economists’ expectations: 53.9

Economists’ expectations: 55.5

As the table displays, both activity in the manufacturing and services sectors remained in expansionary territory in June, but were down from the previous month and fell by more than expected – revealed in the survey to be a 16-month low.

Thus, investors sold the EUR/USD this morning over concerns the eurozone economy could soon start contracting – or going into recession.

A dig deeper into the surveys, showed manufacturing output contracted for the first time in two years, while the outlook soured as demand stagnated – with execs blaming the rising cost of living, concerns over energy and continued disruptions caused by the Russia/Ukraine war and ongoing Covid effects.

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It was a similar story for services, as the surge in tourism and leisure seen in the spring, slowed markedly.

“Eurozone economic growth is showing signs of faltering as the tailwind of pent-up demand from the pandemic is already fading, having been offset by the cost of living shock and slumping business and consumer confidence,” said Chris Williamson, chief business economist at S&P Global, which compiles the PMI surveys.

Euro-US dollar (EUR to USD) exchange rate

UK PMI preliminary readings for June

UK manufacturing PMI – June

UK services PMI – June

Headline PMI: 53.4

Headline PMI: 53.4

Last month: 54.6

Last month: 53.4

Economists’ expectations: 53.7

Economists’ expectations: 53

While business conditions worsened in UK manufacturing, the slowdown was not as marked as in the eurozone, while the services PMI held steady from the previous month and managed to beat consensus expectations.

Current conditions were broadly unchanged, but managers noted demand conditions were subdued as new orders slowed for a fourth month in a row. As in the eurozone, execs were anxious about future conditions, citing the impact on demand of rising living costs and the effects of rising production costs.

Williamson said: “Business confidence has now slumped to a level which has in the past typically signaled an imminent recession.

“The weakness of the broad flow of economic data so far in the second quarter points to a drop in GDP which the forward-looking PMI numbers suggest will gather momentum in the third quarter.”

British pound-US dollar (GBP to USD) exchange rate

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