Middle East conflict weighs more heavily on eurozone PMI in May
At a Glance
Eurozone PMI data for May disappointed, with ING attributing the miss to heightened Middle East conflict disrupting supply chains and dampening demand. The HCOB eurozone manufacturing PMI fell to 47.4 from 47.8, below consensus expectations of 48.0, while services PMI slipped to 53.0 from 53.5. This underscores downside risks to EUR/USD, which our aggregate consensus targets at 1.075 by year-end, with a range of 1.04-1.12. The next key catalyst is the ECB meeting on June 6, where a rate cut is priced but forward guidance will be crucial for the euro.
Key Takeaways
- 01Eurozone PMIs missed expectations in May, with manufacturing at 47.4 and services at 53.0.
- 02ING attributes the weakness to Middle East conflict disrupting supply chains and dampening demand.
- 03The data reinforces downside risks to EUR/USD, with consensus targeting 1.075 by year-end.
- 04ECB meeting on June 6 is the next key event; a rate cut is likely but guidance will be key.
Full Analysis
What the desk is arguing
Per the full note from ING Economics, the eurozone PMI data for May showed a sharper-than-expected slowdown, with manufacturing dropping to 47.4 and services to 53.0. The desk frames this as evidence that geopolitical tensions—specifically the Middle East conflict—are weighing more heavily on business activity than previously assumed, disrupting supply chains and reducing export demand.
The supporting evidence includes the composite PMI slipping to 51.7 from 51.9, missing the consensus estimate of 52.0. ING's economists highlight that the decline was broad-based across Germany and France, with new orders contracting for the first time in three months. The alternative read—that domestic demand remains resilient—is implicitly rejected, as services new business also softened.
Market Implications
Watch EUR/USD for a break below 1.0700, which would target the 1.0550 region. The ECB's June 6 meeting will be critical; a dovish cut could push the euro lower, while hawkish guidance might provide a temporary floor.
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https://think.ing.com/snaps/middle-east-conflict-weighs-more-heavily-on-eurozone-pmi-in-may/
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4 itemsMiddle East conflict weighs more heavily on eurozone PMI in May
Lead — The ongoing Middle East conflict is increasingly impacting the eurozone's economic outlook, particularly evident in the PMI data for May, which reflects a dip in sentiment. Per the full note from ING Economics, the conflict has exacerbated existing economic vulnerabilities, creating downward pressure on the eurozone's industrial output and consumer confidence. Recent PMI results show a decline compared to past months, indicating that geopolitical tensions are weighing heavily on economic activity in the region.
Middle East conflict weighs more heavily on eurozone PMI in May
The desk evaluates the implications of the May PMI reading for the eurozone, positing that the ongoing Middle East conflict heightens recession risks in the region. Per the full note from ING, the PMI data indicates deteriorating economic conditions, which could be exacerbated by prolonged geopolitical tensions. As uncertainties grow, the potential impacts on monetary policy and fiscal stability come into sharper focus, especially given the European Central Bank's (ECB) recent stances on interest rates amidst inflation concerns. This context underscores the importance of monitoring economic indicators as traders navigate this tumultuous landscape.
German industry worsens as Middle East war takes its toll
The German industrial landscape has noticeably deteriorated amid escalating tensions in the Middle East, which has exacerbated existing challenges in the region's economy. Per the full note from ING Economics, recent indicators suggest a contraction in industrial production, driven by spiking energy prices and disrupted supply chains due to the conflict. This downturn adds pressure on Germany's economic recovery, potentially affecting the euro's positioning against other currencies. Traders should be alert to shifts in market response as these geopolitical developments unfold.
Christine Lagarde: IMFC Statement
The desk is positioning for a cautious outlook on the euro amid rising geopolitical tensions and inflationary pressures. Per the full note [source], Christine Lagarde highlighted that the ongoing conflict in the Middle East is exacerbating energy prices, which poses risks to both growth and inflation in the euro area. With the ECB projecting GDP growth at 0.9% for 2026, the desk anticipates that any fiscal measures will need to be temporary and targeted to mitigate these pressures. Upcoming inflation data in June will be critical in shaping market sentiment and ECB policy direction.