EUR/USD: Lower As Spanish Manufacturing PMI Dips

 | Dec 02, 2013 06:09AM ET

The euro has lost ground in Monday trading, following the release of a weak Spanish Manufacturing PMI. In the European session, the pair has dropped to the mid-1.35 range. In other Eurozone releases, Italian and Eurozone Manufacturing PMIs met expectations. Over in the US, today’s key event is the ISM Manufacturing PMI. As well, Federal Reserve Chairman will deliver remarks in Washington, as analysts look for some hints about QE tapering from the Federal Reserve.

Spanish Manufacturing PMI had a dismal October, sliding to 48.6 points from 50.9 last month. This marked the first contraction we’ve seen in the manufacturing sector in six months. There was better news from the Italian and Eurozone Manufacturing PMIs, both of which rose slightly and met expectations. The Italian release came in at 51.4 points, while the Eurozone PMI hit 51.6 points. The euro has dropped on the news and remains under pressure.

There was some good news out of the Eurozone on Friday, as inflation and unemployment figures beat their estimates. The Eurozone CPI rose to 0.9%, edging above the estimate of 0.8%. However, inflation remains well below the ECB target of 2.0%, which could lead to the ECB reducing rates at its policy meeting later this week. The Unemployment Rate also showed slight improvement, as it dipped to 12.1%, down from 12.2% in the previous release.

With inflation and growth remaining weak in the Eurozone, the ECB may make a monetary move later this week. It could opt to cut the benchmark rate for a second straight month, or lower the deposit rate, which currently stands at 0.0%. However, a move into negative territory would represent unchartered territory and could have negative consequences for the economy. If the ECB decides to reduce the deposit rate, we could see a "mini cut" of less than 0.25%. The markets are expecting the Bank to hold the current benchmark rate of 0.25%, but just last month the markets were caught by surprise as the ECB cut the rate from 0.50%.

Over in the US, the markets will be keeping close tabs on this week's US employment releases, as the Fed is likely to step in and taper QE if employment numbers continue to improve. Unemployment Claims have looked sharp for the past two releases, and if the Non-Farm Payrolls and Unemployment Rate look solid, this week, the US dollar could gain ground against the euro.