Euro tumbles in London

The euro fell sharply on Monday after contraction in the eurozone's manufacturing and service sectors, while the dollar gained as some investors bet on a hawkish message from the Federal Reserve later in the week. Markets are pricing in just a 10 percent chance of a Fed rate hike this week from the current 2 percent, but see scope for it to start paving the way for future tightening.
In contrast, although the European Central Bank has signalled it may well raise rates in July, policymakers have lined up to point out that the move is likely to be a one off - a view further supported by Monday's crop of weak data. "We're seeing weakening growth in the euro area and today's data just confirms that," said Derek Halpenny, senior currency strategist at BTM-UFJ in London.
The euro was down half a percent $1.5524 by 1013 GMT, having hit session lows of $1.5500 after the data, while the dollar index added 0.6 percent to 73.421. The euro fell 0.2 percent to 167.15 yen, around a yen below the 11-month high struck on Friday. Preliminary eurozone services PMI, which covers companies from cafes to banks, fell to 49.5 in June, while its manufacturing equivalent hit 49.1 - with both indices slipping into contraction territory below the 50.0 watermark.
At the same time, the German Ifo business climate index fell more than expected to 101.3 in June - its lowest since December 2005. Ifo's current conditions and expectations indices also came in below consensus. Following on from the data, the Bundesbank said Germany's economy is set to contract slightly in the second quarter of this year after expanding at its strongest clip since 1996.
Although analysts said it was probably too late for the ECB to abandon its plans for a July rate hike to 4.25 percent, they admitted the data further reduced the chances of any follow on tightening. "The falls are probably not sharp enough to stop the ECB hiking in July. It would take more data on the downside for inflation for them to wait. But the data today will cause some intense debate about rate-setting," said Juergen Michels, economist at Citi. Currency markets paid little attention to the oil price, which rose above $136 a barrel despite Saudi Arabia promising to pump more oil.
BTM-UFJ's Halpenny said the breakdown of the inverse correlation between oil and the dollar could probably be traced back, in part, to recent comments made by Fed Chairman Ben Bernanke. "What Bernanke did was to say to the markets that they don't necessarily view oil anymore as a negative on growth. It seems likely that they would respond to rising oil by tightening monetary policy, so that is a supportive feature for the dollar," Halpenny said.