Yesterday morning’s reports from Old Continent weakened the euro. It all started with weak PMI figures for France, followed by a hefty disappointment from German industry, and finally, Eurozone-wide indices failed to meet expectations. Weak economic activity will decrease inflation and thus put pressure on the European Central Bank (ECB) to further relax its monetary policy, aiming to protect the economy from recession. However, the dip of EUR/USD below 1.11 was short-lived. By the end of the day, the main currency pair had managed to recover part of the depreciation.
The composite index of purchasing managers in the eurozone returned to a downward trend. The index dropped from 51.0 to 48.9 points, clearly disappointing expectations. Economists polled expected a minimal drop to 50.5 points. Especially significant drop was evident in the French composite index (from 53.1 to 47.4 points). After the positive one-time effect of the Summer Olympics, a negative baseline trend seems to be emerging. Sentiments continued deteriorating in Germany (from 48.4 to 47.2), causing the purchasing managers index to drop for the fourth consecutive time. The PMI for industry alone fell to its lowest level since October 2023, at 40.3 points.
The data shows the economic weakness of the eurozone and strengthens the belief among market participants that the European economy has trouble sustaining growth in the post-pandemic recovery period.
After yesterday’s data, the OIS market is more inclined to assume a possibility of the ECB cutting interest rates at their October meeting. Just last week, the market estimated a 25 percent chance of a money cost reduction, currently it is already over 57 percent.
While the EUR/USD rate drifted slightly away from the 1.12 level, which currently is the key local resistance established in the last week of August, the rate remains high and has not permanently returned within the flag formation. However, remember that the dollar remains weak, which will certainly curb declines. Yesterday’s data will certainly limit the eurodollar’s growth in the short and medium term, which may mean that we will witness consolidation for some time.
Łukasz Zembik, Oanda TMS Brokers
