PMI disappointment 

The US 2-year yield slipped below 5% as both manufacturing and services PMI fell unexpectedly in August, adding a layer of complexity to US data, which strong enough to push Atlanta Fed's GDP forecast for Q3 to 5.8% last week.  

August PMI numbers in Europe printed even worse numbers than in the US. The manufacturing PMI was slightly better than expected but remained well below the 50 threshold – in the contraction zone. More disquietingly, the euro-area's services PMI slipped below 50 – to the contraction zone for the first time since January. What's even more worrying is that, the services PMI fell into the contraction for the busiest summer month for mass holidays.  

As a result, traders now price around 40% chance for a 25bp hike in European Central Bank's (ECB) next policy meeting, down from 55% before the release. The EURUSD tested the 200-DMA to the downside and remains under the pressure of rising dovish voices for the ECB. And the European bond markets rally: the German 10-year yield fell more than 5.5% yesterday. We see the same gloom across the Channel. All British PMI figures were below 50, and came in worse than expected, pushing Cable shortly below its 100-DMA, which stands near 1.2635. The EURGBP on the other hand fell to a fresh year low, as the continent is now expected to join the UK in its economic demise.  

This being said, slow PMI numbers could eventually convince the ECB to slow down on its rate normalizing policy, but it won't be enough to reverse the policy stance if inflation remains high. The ECB, as the Fed, won't hesitate to push economies into further economic trouble if inflation doesn't come down toward their 2% policy target.   

The set of morose economic data kept the US crude below the $80pb level, even though the US inventories dived more than 6 mio barrels for the second consecutive week. Trend and momentum indicators remain comfortably negative, and the market conditions are far from the oversold territory, meaning that there is room for a deeper downside correction in oil prices. The key level to watch is the $78.40 level, the major 38.2% Fibonacci retracement on the latest rally and which should, if broken to the downside, call the end of the rally and encourage a bearish reversal, which would then pave the way for a further fall to the 200-DMA, which stands near $75.80pb.