3 Reasons Why the Euro Forex Selloff Paused

So much for expecting another euro bloodbath! The shared currency managed to recover against most of its forex peers yesterday, thanks to these three reasons that propped it up. Will these factors be enough to keep the euro supported in the long run or did we just see a temporary bounce? Read on to find out!

1. Euro zone PMIs weren’t bad at all!

As I’ve mentioned earlier this week, most forex junkies had been expecting to see more signs of weakness from the euro zone flash PMI reports, with hardcore euro bears predicting that the actual figures would fall short of estimates. However, the region proved that things aren’t so bad, as most of the results came closely in line with expectations.

France, which is the euro zone’s second largest economy, even showed an upside surprise with its manufacturing PMI climbing from 48.3 to 50.4 and indicating a shift from industry contraction to expansion. Its services PMI rose from 50.6 to 51.2, slightly higher than the projected 51.1 figure. In Germany, the manufacturing PMI dipped from 53.3 to 52.5 while the services PMI fell from 54.9 to 54.3, reflecting a weaker pace of growth in both sectors. Overall, the euro zone saw declines from 52.3 to 52.0 for its manufacturing PMI and from 54.4 to 54.4 for its services PMI this September.

According to Markit, the business survey results revealed that the euro zone has still been able to round off its best quarter in four years even with the slight dip in activity this month. In addition, the agency noted that the sub-indices of new orders and raw materials purchases suggest a strong pickup for the last stretch of the year.

2. ECB Governor Draghi: Not enough evidence for more QE

ECB head honcho Draghi sure knows a thing or two about playing with the forex market’s feelings, as he shared a surprisingly upbeat take on the euro zone economy during his latest speech. Barely a few weeks have passed since he admitted that the central bank is open to further easing if price levels fall further, then he changed his tone to indicate that he’s expecting inflation to rise by the end of 2015.

Super Mario went on to say that the risks to the euro zone’s growth prospects have increased due to the downturn in China and emerging markets, but he also emphasized that policymakers need more time and economic evidence to decide if additional stimulus is warranted. Draghi also shone the spotlight on Greece, saying that the debt-ridden nation has made considerable progress with its reforms and that debt relief could be a possibility if it sticks to its bailout requirements.

3. ECB member Weidmann says euro zone recovery solidified

Just after ECB Governor Draghi’s testimony, German central bank head and ECB Governing Council member Jens Weidmann grabbed the mic and echoed his buddy Mario’s optimistic tune. He downplayed deflationary concerns in the region, citing that the slump in energy prices is just temporary and that these might even pump up spending.

Weidmann acknowledged that the region is still facing headwinds for which their current accommodative bias is appropriate, but he also cautioned that the expansionary monetary policy “shouldn’t be continued any longer than absolutely necessary.”

EUR/USD 15-min Forex Chart

EUR/USD 15-min Forex Chart

With that, EUR/USD grabbed the opportunity to bounce off the 1.1100 support area and erase some of its recent losses. Other euro pairs enjoyed similar rallies, with EUR/JPY recovering by nearly 150 pips and EUR/GBP climbing back above the .7300 handle.

Of course it’s tough to tell whether or not the euro can be able to hold on to its latest gains and go for more, as this hinges on the respective central bank biases of its forex counterparts. In case you needed a refresher on these, I’ve rounded up the latest monetary policy statements right here.