(Bloomberg) — The euro fell to the lowest level in two years as traders bet the European Central Bank will have to cut interest rates aggressively to bolster the region’s economy.
The common currency fell more than 1% to $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 nearly 60%, 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 prospect of harsh tariffs under a Donald Trump presidency in the US risks dealing a blow the region’s export-dependent economies. That’s all while Germany and France are grappling with domestic political crises.
Traders are now betting the currency could slide toward parity against the dollar — something that’s only happened twice since it was launched in 1999.
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 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.
Euro-area bonds jumped as the market priced in a weaker growth outlook. Two-year German bond led gains, sending the yield down 13 basis points to 1.98%, the lowest since 2022. Traders also raised bets 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.
Still, the ECB may keep cutting at the current pace. The higher cost of natural gas and rising euro-zone wages pose inflationary risk, arguing in favor of a cautious approach.
ECB Vice President Luis de Guindos said earlier this week that officials shouldn’t rush the process due to uncertainties including rising trade tensions and global conflicts. Ahead of Friday’s PMI’s, Yannis Stournaras, among the more dovish government council members, said the rate should be lowered by a quarter-point while not excluding at larger move.
“We see signs inflation is becoming a bit more of challenge,” said Guy Miller, chief market strategist at Zurich Insurance Co. “I suspect it will still be 25 basis points because of the messaging they have given.”
–With assistance from Alice Atkins, Vassilis Karamanis, Greg Ritchie and Sujata Rao.
(Updates with additional context throughout.)
©2024 Bloomberg L.P.
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Publish date : 2024-11-22 02:40:00
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