Spain services sector returns to growth in May but price pressures persist

Spain's services sector returned to growth in May, according to the latest PMI data, offering a glimmer of hope for the euro area's fourth-largest economy. The headline index recovered above the 50.0 breakeven mark, supported by a marginal increase in new business. However, the underlying performance remains weak, with the second quarter on track to be one of the worst in over five years.

The recovery in services activity is a positive sign for the Spanish economy, which has been a relative bright spot in the euro area compared to struggles in Germany, Italy, and France. However, the persistent cost pressures highlighted in the report are a key concern for currency traders. Input prices remained acute in May, suggesting that inflation in the services sector is proving sticky. This could complicate the European Central Bank's policy path, as it balances the need to support growth with the imperative to control inflation. For forex markets, any signs of persistent price pressures in the euro area's larger economies tend to support the euro, as they reduce the likelihood of aggressive rate cuts. Live FX prices and charts on NowPrice show how the euro is reacting to the data.

Looking ahead, traders will be watching the upcoming ECB meeting for any hints on the pace of monetary easing. The Spanish services PMI, while not a market-mover on its own, adds to the narrative of a euro area economy that is struggling to gain momentum. The key question is whether the ECB will prioritize growth or inflation in its upcoming decisions. With the second quarter shaping up to be weak, the central bank may lean towards a more accommodative stance, which could weigh on the euro. However, if price pressures persist, the ECB may be forced to maintain a tighter policy, providing support for the single currency.