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    Eurozone services PMI slows unexpectedly in June but manufacturing PMI rises to 6-month high

    The latest Markit PMIs painted a mixed picture for Eurozone economic activity in June as the services sector appeared to struggle, while manufacturers enjoyed a strong month. Political and economic uncertainty were cited as the main reasons for the drop in business confidence across the region.

    The euro area’s services PMI according to Markit’s flash reading for June declined to 52.4 from 53.3 in May. The figure is the lowest in 18 months and compares with estimates of a smaller drop to 53.1. The slowdown was mainly as a result of weak growth in new business orders in the sector.

    It was a different story for the manufacturing sector though as activity rose to a 6-month high, with the manufacturing PMI index reaching 52.6 in June. This is significantly above expectations of 51.3 and is sharply up on the previous month’s figure of 51.5. The sector saw the best export performance since December. It was led by a surge in German manufacturing output, which grew at the fastest rate in over two years.

    Overall activity in the Eurozone slowed to a 17-month low as the boost in manufacturing activity was unable to offset the slower growth in the services sector. The Eurozone Composite PMI fell to 52.8 in June from 53.1 in May. Expectations were for a milder drop to 53.0.

    France appeared to be the underperformer as activity fell in both the country’s services and manufacturing sectors. The composite PMI for France dipped below 50 – indicating contracting activity. Strike action and uncertainty from Britain’s EU referendum are thought to have contributed to the weak French PMI readings for June.

    In contrast, the German composite PMI held up reasonably well, declining to only 54.1 in June from 54.5 in May. However, even the German services sector had a slow month in June with activity expanding at the slowest pace in 13 months.

    Despite the overall weaker performance of the Eurozone economy in June, there were positive signs that the region remains on a recovery path. Backlogs of work continued to rise in a sign of rising demand and employment rose at the fastest rate so far this year.

    The euro briefly fell against the dollar after the weaker-than-expected readings in the French and German composite PMIs but later recovered. The single currency declined to 1.1316 dollars after the data but later resumed its uptrend to break above 1.14 dollars. The euro has been on an upward path against the dollar since yesterday on growing optimism that the ‘remain’ camp will prevail in the UK’s ‘in’ or ‘out’ referendum of EU membership.

    Uncertainty over the outcome of today’s EU referendum in the UK had also been weighing on the euro in recent months. If the UK votes to stay in the EU, it will likely boost the euro as well as the pound in the short term. However, a factor to watch from today’s Markit PMI reports was ongoing downwards pressure on output prices. Eurozone firms cut prices for the ninth straight month in June in order to secure higher sales. This would likely worry the European Central Bank, which has already had to resort to implementing ultra-loose policies in a bid to prevent the region from falling into a deflationary spiral.

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