Release: Euro-Zone Manufacturing PMI (Feb. Flash)
Consensus Forecast: 49.4
Previous: 48.8

Release: Euro-Zone Services PMI (Feb. Flash)
Consensus Forecast: 50.7
Previous: 50.4

Date/Time: 02/22/12 04:00 AM ET (9:00 GMT)

Euro-Zone Economy to Determine ECB’s Next Steps

With the Greek second bailout agreed to, but with the problem of Greece still not fully resolved, attention now turns to the latest economic figures from the euro zone. In the European Wednesday trading session we see the release of the preliminary readings for manufacturing and services PMI’s for February.

After seeing the euro zone post a 0.3% quarterly decline in the fourth quarter, market participants and analysts are parsing incoming data to judge how the euro zone economy is faring in the first quarter of 2012. in January, euro zone services activity expanded while manufacturing contracted. Looking at the two major economies in Europe both Germany and France saw the services sectors growing at a decent clip, at 53.7 and 52.3 respectively. The expectation is that February was see similar readings from those major economies.

The euro zone as a whole the consensus forecast is that the services PMI will show activity expanding, though as we factor in the periphery economies the index is expected to come in at 50.7.

Manufacturing activity meanwhile  rose in Germany in January (51.0) but fell in France (48.5) and in the other major euro-zone economies, though the pace of contraction slowed. The Euro-zone as a whole is forecast to see a 49.4 reading, compared to 48.8 in January, which would mean that the pace of contraction slowed even further.

Data from January and the expectations for February tell us economic activity has stabilized and that the euro zone should overt a technical recession by posting growth in the first quarter. While it certainly a positive that that economic locomotive of the euro zone – Germany – is escaping the worst of the sovereign debt crisis the same can’t be said for the periphery.

Therefore if euro zone manufacturing and services PMI’s come in below expectations, it even if Germany and France meet theirs, it could pressure the euro as we head into the second half of the week as it would imply the ECB which require further action. The ECB has said that it does not want to continue providing long-term loans via its LTRO tenders, but lower interest rates are still a possibility.

The market has eased its expectation around interest-rate cuts for the ECB compared to late September and early October, as the ECB actions in December helped to calm the funding crisis faced by the European banking system.

Looking at Credit Suisse overnight index swaps the inter-bank market is pricing in only 10 basis points of cuts one year from now, meaning that even a quarter-point cut is not fully priced in for then.

What could change market expectations for the ECB would be deterioration in economic growth and that is why these leading indicators of GDP growth – the manufacturing and services PMI’s – are important and can have an impact in tomorrow’s European session.

PMI’s Could Serve As A Catalyst for EUR/USD Direction

The EUR/USD pair finds itself in an interesting predicament as it resembles a head and shoulders pattern with an upward sloping neckline though it continues to trade above both the 200 and 55 hourly EMA’s. If the PMI’s come in weaker than expected it could be the catalyst that pushes the euro through that neckline and gives impetus to a further correction of the most recent upswing started last Wednesday with the 200-ema serving as the first important level of resistance.

If the PMI is come in stronger-than-expected showing that periphery economies are able to whether the most recent setbacks in the sovereign debt crisis and the fourth quarter 2011 the euro may be able to find support either at its lows from Wednesday’s session or at the aforementioned moving averages and give the euro chance to reclaim its highs from earlier in the week near 1.3275 and 1.3290.

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Nick Nasad is an analyst, educator, and trader; and one of the main contributors to  FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.