Euro tumbles as gloomy PMIs dampens outlook for future ECB hikes

THE euro continued its retreat from a more-than-2-week high as disappointing activity data from France and Germany pushed the single currency lower, a day after the European Central Bank (ECB) highlighted the path for interest rates would be data dependent.

German business activity unexpectedly shrank in July while French manufacturing activity contracted and growth in services slowed, preliminary purchasing managers' (PMI) surveys showed.

Analysts said the eurozone economy appeared to be heading towards a recession.

"The US economy is slowing but Europe is slowing quicker. It's the reason why the FX market continues to be underweight the euro," said Viraj Patel, macro strategist at Vanda Research.

The euro was already softer, even after the ECB raised rates by a more-than-forecast 50 basis points (bps) on Thursday (Jul 21), as its new tool to shield highly indebted states from soaring borrowing costs failed to impress investors.

Analysts also said the removal of the ECB's forward guidance on rates and the move to a meeting-by-meeting, data dependent stance gives the central bank a small window of opportunity for further tightening.

"Maybe the ECB can eke out another hike in September but judging by the direction of travel for the European economy I don't think they'll be in any shape or form to be talking about rate hikes in December or early next year," Patel added.

Traders are now pricing in under 110 bps of ECB rate hikes by December, down from around 120 bps before the data.

At 1047 GMT, the euro was down 0.72 per cent to US$1.01575, retreating further from Thursday's knee-jerk peak of US$1.0279 following the ECB's hefty rate hike.

The US dollar index - which measures the greenback against 6 major peers, with the euro the most heavily weighted - was last up 0.46 per cent to 107.10, following a 0.34 per cent slide on Thursday.

For the week, the index remains down 0.83 per cent, the biggest decline since May 29 and its first losing week in four, as disappointing US data has dampened expectations of a large 100 basis point (bps) hike from the Federal Reserve next week.

Traders now put 83.7 per cent odds on the Federal Open Market Committee raising rates by 75 bps on Jul 27, with a 16.3 per cent probability of a full-point hike.

Elsewhere, sterling slid 0.53 per cent to US$1.1940, trimming its gain for the week to 0.59 per cent, still the most since late May.

The US dollar rebounded 0.1 per cent to 137.475 yen with the Japanese currency on track for its first weekly gain against the greenback in 8 weeks.

The risk-sensitive Australian dollar fell 0.2 per cent to US$0.69225 and the New Zealand dollar also slipped 0.2 per cent, to US$0.6238. REUTERS