-Mighty Eurozone manufacturing sector softens in August, say IHS Markit.

-Services sector offsets industrial slowdown but firms fret about outlook.

-Analysts say ECB still to end QE but EUR outlook remains uninspiring.

© European Central Bank, reproduced under CC licensing

The Euro turned lower against the US Dollar Thursday after ISH Markit surveys revealed a further slowdown in the Eurozone's mighty manufacturing sector during August, suggesting the continental economy is yet to rebound from the slowdown seen at the start of the year.

IHS Markit's Eurozone manufacturing PMI fell to 54.6 in August, from 55.1 back in July, when consensus had been for it to hold steady at 55.1. The fall was led mainly by a decline in German manufacturing activity, with the index for Germany alone falling from 56.9 to 56.1.

This came alongside a decline in company expectations for future growth, with the number of firms expecting conditions to improve over coming months falling near to its lowest level for almost two years. New order growth also slipped close amid the smallest increase in exports for nearly two years.

"Warning lights are flashing. Analysis of past data indicates that demand needs to pick up to sustain current output and employment growth in coming months. Yet the risks seem tilted to the downside," says Chris Williamson, chief business economist at IHS Markit.

However, the Eurozone services index rose by a fraction in August, from 54.2 to 54.4, as activity picked up in Germany, France and other Eurozone member states. That could provide some offset to the deteriorating outlook for the industrial sector, at least as far as quarterly GDP numbers are concerned, according to IHS Markit.

The combined effect of the services and manufacturing data was to push the Eurozone composite PMI up by a fraction in August, from 54.3 to 54.4. This means the Eurozone economy is probably on course to achieve around the same rate of growth seen back in the first quarter, according to independent economists.

"August’s small increase in the euro-zone PMI suggests that the region’s economy is performing well in Q3, which will reassure the ECB that it is right to be normalising monetary policy very gradually," says Jessica Hinds, a European economist at Capital Economics. "The rise in the Composite PMI’s new orders component provides some further cause for optimism, but firms appear increasingly worried about the outlook."

The Euro was quoted 0.30% lower at 1.1551 against the US Dollar shortly after the release, but 0.11% higher at 0.8987 against the Pound, which translates into a 0.13% loss that left the Pound-to-Euro rate trading at 1.1124.

Europe's single currency is down by around 3% against the US Dollar this year, after having more than reversed what was a 4% 2018 gain back in the first-quarter.

A 2018 slowdown in Eurozone economic growth, which came against a backdrop of a strengthening US economy, was at the heart of the reversal in fortune for the single currency.

This mismatch in economic activity has enabled the US Federal Reserve to go on raising its interest rate at a time when slower economic activity saw the European Central Bank warn markets about being too optimistic in their outlook for Eurozone interest rates.

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

"The Composite output prices index fell, suggesting that inflationary pressures are not building sharply. With underlying inflation still weak and firms worried about the risks to the outlook, the ECB is likely to continue to stress that its plans to normalise policy remain contingent on incoming data and that interest rates are going to stay on hold at least throughout next summer," says Hinds.

Analysts have said that a revival of the uptrend that pushed the Euro to a double-digit gain over the US Dollar in 2017 will first require economic activity to pick back up in Europe.

Only when this happens will investors and traders have sufficient incentive to dump the higher-yielding and still-rising US Dollar in favour of the Euro and other currencies.

"The rates market provides the euro with little or no support and will go on doing so until economic data and European politics improve," says Kit Juckes, chief currency strategist at Societe Generale. "EUR/USD, having failed to hold above 1.16, looks slightly marooned for now. A position-drive bunce is one thing, but a more meaningful move needs new ‘news'."

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here