Euro falls to lowest since 2022 as bets on ECB rate cuts surge
The single currency fell more than 1% to US$1.0335, the weakest since November 2022
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 per cent to US$1.0335, the weakest since November 2022 after data last Friday (Nov 22) showed that 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 per cent, from about 15 per cent 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 US president-elect Donald Trump has further muddied the outlook for the region, with traders betting that the currency could extend its slide towards parity against the US dollar – something that’s only happened twice since it was launched in 1999. The premium paid in the options market to hedge against further losses is now near the highest in five months.
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.
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.
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“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.
Euro-area bonds jumped as the market priced in a weaker economic outlook. Two-year German bond led gains, sending the yield down 13 basis points to 1.98 per cent, 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, said Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs.
“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.
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