After the rally ended last week, investors shifted their focus to the today's release of important manufacturing data in both the EU and the US.
China's manufacturing PMI data have been published this morning. They showed an increase to 48.1 points in May compared to April's reading of 46.0 points. Although these figures are below the key level of 50 points indicating a rise in business activity, investors consider them as a positive sign of a possible recovery in China's manufacturing activity. Consequently, they will lead to a rising demand for Chinese factory production.
Germany's manufacturing PMI data over the past month will be released later. According to the consensus estimate, the index should slightly increase to 54.7 points against 54.6 points in April. Meanwhile, the indicator is poised to decline steadily to 54.4 points from 55.5 points in the euro area.
How will the euro react to positive data?
Its reaction is most likely to be weak. This is mainly caused by the general market sentiment which remains negative mainly due to galloping inflation in the EU. According to yesterday's data, it jumped to unprecedented levels of 8.1% at least in the last 30 years. On the one hand, soaring inflation could trigger a possible dramatic rate hike by the ECB. On the other hand, it could cause stagflation with other significant problems. Taking into account hostilities in Ukraine which the EU is entirely focused on, investors are unlikely to be much interested in European assets. Moreover, this is confirmed by a significant outflow of capital to the US. Therefore, any exponential growth in the EUR/USD pair is unlikely.
The manufacturing PMI data from the Institute for Supply Management (ISM) will be released later in the afternoon. The index is expected to fall to 54.5 points in May from April's reading of 55.4 points. If the figures are negative, it could put pressure on the US stock market again and push the dollar higher on Forex.
Moreover, the Central Bank of Canada's monetary policy meeting will be the focus of concern for the foreign exchange market. The regulator is expected to raise the key interest rate immediately by 0.5% to 1.5%. Although the market has already considered that scenario, a recovery in crude oil prices and a possible pullback in the dollar could lead to a renewed decline in the USD/CAD pair.
In conclusion, the market considers the current situation as a closing stage of a bearish period and believes that the global economy will not experience recession and continue expanding. This is indicated by its attempts to rise amid positive news and economic statistics.
