Source: Reuters

(Nov 22): The euro fell to the lowest level in two years as traders bet the European Central Bank (ECB) will have to cut interest rates aggressively to bolster the region’s economy.

The single currency fell more than 1% to US$1.0335, the weakest since November 2022 after data showed business activity in the bloc’s two biggest economies contracted more than expected. The market-implied odds of a half-point rate cut next month jumped to more than 50%, from about 15% on Thursday.

The euro is one of the worst-performing currencies across the Group-of-10 over the past three months as the outlook for Europe darkens. The prospect of harsh tariffs under Donald Trump has further muddied the outlook for the region, with traders betting the currency could slide toward US$1.

The euro is “under immense pressure,” said Kristoffer Kjaer Lomholt, head of FX research at Danske Bank. The PMI reports are triggering “broad based concerns for the cyclical outlook for the eurozone and by extension the easing outlook from the ECB,” he added.

The data also underlines the challenge for ECB officials, who must decide next month whether to speed up the pace of easing as Europe’s fragile economy is increasingly squeezed. It stands in sharp contrast to the US, where Trump’s promise of tax cuts have prompted markets to price in higher growth in the coming years.

“These PMIs confirm the divergent growth outlooks between the US and Europe that we had in our minds before the election and after,” said Jordan Rochester, head of macro strategy at Mizuho International.

The two-year German bond led gains, sending the yield down 13 basis points to 1.98%, the lowest since 2022. Traders also amped up wagers on the extent of rate cuts through next year, with about 150 basis points expected.

Options suggest the common currency will extend its recent losses into year-end. Traders need to pay the widest premium in nearly five months to hedge against euro weakness.

The gauge of business activity for the euro area as a whole also shrank. Analysts had estimated no change and were particularly surprised by a steep deterioration in services with activity dropping for the first time since January.

The composite Purchasing Managers’ Index by S&P Global slid to 48.1 from 50 in October, dipping back beneath the level that separates growth from contraction.

A recent escalation in hostilities between Ukraine and Russia is also casting a long shadow over the region and adding to the uncertain outlook, Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs Inc, said in an interview on Bloomberg TV.

“Europe needs lower rates, manufacturing needs lower rates. You have these multiples factors currently weighing on Europe and that has made us quite bearish across assets,” he said.

Source: Theedgemarkets

At the October European Central Bank meeting, President Christine Lagarde said that everything was heading in the same direction: downwards. She put a lot of emphasis on the PMIs, which had just dropped below 50 – signalling contraction – in September. Since then, the most important indicators have actually gone up, including GDP and inflation.

The November PMI is another wake-up call for eurozone policymakers that the economy continues to show signs of weakness. But after the third-quarter GDP figures showed an acceleration, the question is how seriously this signal will be taken. The boy who cried wolf comes to mind. But don’t be mistaken, the underlying message is in line with GDP growth slowing markedly. We expect the fourth quarter to show stagnation with 0% growth.

According to the survey, the services PMI also dropped below 50 and signalled contraction. New business is weakening again for both manufacturing and services with export orders in particular being down sharply as the eurozone economy battles weak demand from abroad. Businesses also became gloomier about the outlook for the year ahead.

For prices, there was a small uptick in input cost inflation for the service sector, likely related to wage growth. Output prices also rose a bit compared to last month, but remain below last year’s average. Ultimately, price pressures remain muted and with demand continuing to come in weaker, worries about persistent above target inflation should fade. Amid a lot of noise around the direction of the eurozone economy, that sign is something to take seriously.