The euro was the story prior to the Fed on Wednesday, as the single currency moved above $1.22 for the first time since 2018.

Flash PMIs for the euro-area came in better than expected for December, a welcome development considering market worries that renewed lockdowns would undermine activity, presaging a double-dip recession.

The flash read on IHS Markit’s services gauge for France was 49.2, better than even the most optimistic estimate from economists, and a full nine points better than consensus, which was looking for just 40.

The sub-50 reading still marks the fourth straight month of contraction, but this is a big relief. New business surged to 51.6 from 37.4. France’s composite gauge printed 49.6 versus an estimated 43.

“Following the initial contraction after the reimposition of lockdown measures in November, there was a far softer decline in French business activity during December,” IHS Markit said. “Although strict COVID-19 measures remained in place, private sector firms posted only a marginal decline in activity,” economist Eliot Kerr mused, before flagging “the return to growth territory for new orders” as a possible sign that “clients are now beginning to look beyond the current economic downturn.”

In Germany, the flash read for services in December was 47.7. That too was considerably better than the 44 consensus expected. The manufacturing gauge in Germany came in at 58.6, the highest in nearly three years and the sixth consecutive month of expansion.

Perhaps not surprisingly, inflationary pressures are building.

“The global recovery in goods production has resulted in the scarcity of a number of raw materials and led to a sharp squeeze on supply chains, with sea freight capacity one of the areas under growing pressure,” the color that accompanies the release reads. “The situation in the manufacturing sector, where rapid growth is resulting in supply bottlenecks and strong cost inflationary pressures, is reminiscent of that seen during the rebound from the global financial crisis a decade ago, only this time there’s the added disruption from a global pandemic to contend with.”

At the euro-area level, the flash reads on manufacturing, services, and the composite gauge all handily beat estimates.

“The eurozone economy is faring better than expected in December,” IHS Markit ventured. “The data hint at the economy close to stabilizing after having plunged back into a severe decline in November amid renewed COVID-19 lockdown measures.”

Chris Williamson, the group’s Chief Business Economist, suggested Europe’s fourth quarter downturn “looks far less steep than the hit from the pandemic seen earlier in the year,” albeit with plenty of dispersion by sector.

“Companies have become increasingly optimistic about the year ahead, with vaccine rollouts expected to help restore businesses to more normal trading conditions as 2021 progresses,” he said, on the way to cautioning that “while vaccines mean there’s light at the end of the tunnel, the near-term still looks very challenging for many consumer-facing companies.”

The upbeat numbers pushed the euro markedly higher, while the dollar hit in a new multi-year low.

This will presumably call for more ECB verbal intervention. “The strong PMIs [were] a perfect reason to try out how much higher euro-dollar can be pushed until the ECB does comment on the exchange rate again,” Commerzbank’s Thu Lan Nguyen said.

It’s not just vaccine optimism driving sentiment in Europe. Jointly-guaranteed fiscal stimulus is also a positive catalyst, and while it might seem laughable to suggest that negative rates support the currency, one thing about going negative is that it lowers the odds of more rate cuts if for no other reason than policymakers will be averse to venturing too much further into the great unknown, preferring to lean on more QE instead.

Of course, all of this comes as the region’s largest economy, Germany, plunged back into a full lockdown. And on that score, Germany logged more than 900 deaths in the last 24 hours, a record. It’s now possible, Angela Merkel suggested, that the lockdown could last beyond January.

ING called the flash PMIs “a huge surprise,” but cautioned that the market shouldn’t “celebrate the end of the downturn just yet as Germany and the Netherlands get set to go into a harsher lockdown.” “Even PMIs are backward-looking in times of COVID-19,” Senior Economist Bert Colijn remarked.


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