Euro Holds Ground Against Franc as PMI Slowdown Shifts Focus to Inflation Data

Key Moments

EUR/CHF Steadies After Eurozone PMIs

The Euro (EUR) is broadly stable against the Swiss Franc (CHF) on Tuesday as market participants evaluate a substantial batch of Eurozone economic indicators. At the time of writing, EUR/CHF is trading near 0.9289, bringing an end to a two-session losing run.

The HCOB Composite Purchasing Managers Index (PMI) for the Eurozone declined to 51.5 in December from 51.9 in the prior month. The reading still signals expanding private-sector output, but at a more moderate pace. The Services PMI also softened, moving to 52.4 from 52.6.

Mixed Activity Across Major Eurozone Economies

Country-level data presented a varied picture for the region.

In Germany, the HCOB Composite PMI dipped to 51.3 in December from 51.5. However, the Services PMI in the bloc’s largest economy inched up to 52.7 from 52.6, keeping services activity comfortably in expansion.

Spain’s services sector stood out with stronger growth toward the end of the year, as the HCOB Services PMI increased to 57.1 in December from 55.6.

By contrast, Italy’s services industry showed signs of slower growth, with the HCOB Services PMI falling to 51.5 from 55. In France, overall conditions remained subdued. The HCOB Composite PMI edged down to 50.0 from 50.1, while the Services PMI slipped to 50.1 from 50.2.

Eurozone and German Inflation Data in Focus

Market attention now turns to the next round of inflation readings. German inflation figures are due later in the day, followed by preliminary Eurozone data on Wednesday. These releases are expected to shed further light on price dynamics in the currency bloc and could influence expectations for the European Central Bank’s (ECB) future policy trajectory.

Economists anticipate that underlying price pressures will largely hold steady. Projections point to Eurozone Core HICP rising 2.4% YoY in December, unchanged from the previous print. Headline HICP inflation is expected to ease slightly to 2.0% from 2.1%.

Swiss Data Weakens as Manufacturing Contracts Further

On the Swiss side, recent figures have highlighted softer business conditions. The SVME Purchasing Managers’ Index dropped to 45.8 in December from 49.7, moving further into contraction territory and highlighting ongoing weakness in Switzerland’s manufacturing sector.

Investors will also be watching Swiss inflation data scheduled for Thursday. Consensus expectations point to the Consumer Price Index (CPI) declining 0.1% MoM in December after a 0.2% fall previously. On an annual basis, inflation is forecast to edge up to 0.1% from 0.0%.

A weaker-than-expected outcome could intensify concerns about persistently subdued price growth and heighten speculation that the Swiss National Bank (SNB) may face renewed pressure to contemplate a return to negative interest rates.

Background: The Euro and Key Policy Drivers

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.

EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The Role of the ECB

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.

The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.

The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Inflation Data and the Euro

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control.

Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Economic Indicators and Trade Balance

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.

A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.

Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.

If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.