On May 21st, data from France, the second-largest economy in the Eurozone, significantly impacted the euro's movement. At 15:15 Beijing time, France released its May Manufacturing PMI, which came in at 48.9. This figure was notably lower than the previous reading of 52.8 and fell short of the forecast of 52.2. This marks the first time in five months that France's Manufacturing PMI has dropped below the critical 50-point threshold, indicating contraction. The May Services PMI, released simultaneously, was reported at 42.9, also significantly below the previous 46.5 and the expected 46.6.
Market participants had anticipated little change in France's May PMI figures for both manufacturing and services compared to prior data. However, the actual results were substantially below both market expectations and previous values, signaling a clear sign of macroeconomic contraction in France. As France's PMI data is released ahead of Germany's and the broader Eurozone's, the weak performance raised market concerns that the entire region's PMI data would also disappoint.
In terms of market reaction, immediately following the release of the French PMI data, the EUR/USD pair fell from a high of 1.1617 to a low of 1.1608 within one minute, a drop of 9 basis points. Over the subsequent 11 minutes, the decline continued, with the pair touching a low of 1.1593, resulting in a cumulative loss of 24 basis points. For minute-level price action, a 24-basis-point move represents a significant decline.
The primary reasons for the contraction in France's manufacturing and services sectors in May are multifaceted. These include rising fuel and energy costs, shortages of raw materials, and broader economic uncertainties, all occurring against a backdrop of weak demand. For businesses, increasing input costs coupled with lackluster demand improvement makes scaling back production the most logical choice. Widespread capacity reductions by companies could subsequently lead to a decrease in hiring and a rise in unemployment.
For the European Central Bank, maintaining price stability and full employment are core objectives. Regarding price stability, rising international oil prices have placed the entire Eurozone at risk of high inflation, leading some ECB members to express support for an interest rate hike in June. However, the precondition for a rate hike is a stable labor market. Should the labor market show signs of deterioration, raising interest rates would become a high-risk policy option.
The chart displays French government bond yields across different maturities. The 1-month yield is at 2.05%, while the 1-year yield is at 2.96%, a spread of 91 basis points. This suggests the market is pricing in the possibility of more than three ECB rate hikes over the next 12 months. However, if the contraction in France's manufacturing and services sectors leads to a rapid increase in unemployment indicators, the potential number and magnitude of ECB rate hikes could be significantly reduced. For the medium-term outlook of the EUR/USD pair, if this scenario materializes, it would face substantial downward pressure.