Euro in a mild bout of weakness

The Euro (EUR) suffered a mild bout of weakness on Monday, as the mostly disappointing purchasing managers' indices were gradually released. For France, for Germany, and finally for the euro area aggregate. For the aggregate, both sub-indices – for manufacturing and for the services sector – were weaker than all analysts surveyed by Bloomberg had expected in advance. For market participants, the scent of recession in the euro zone continues to linger, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

Significant deterioration of the economic situation to weigh on EUR/USD

“The weakness did not last. Europe's single currency was able to make up for most of the losses quite quickly. Nevertheless, the market's nervousness when it comes to poor euro zone economic data should be a lesson to us. I would like to remind you once again that these reactions to this type of news are so strong because they simultaneously serve two different EUR-negative narratives.”

“The market is already expecting very low inflation in the euro area. If a recession were to occur, the market would have to assume that inflation will be so low that the ECB would have to act quickly to prevent a return to deflation. That would argue for very rapid ECB interest rate cuts. Further euro area economic weakness would again reinforce the impression that the euro area has a sustainable growth problem, unfolding since the immediate recovery from the pandemic is over. But in such an economic area, it is less likely to find many profitable investment opportunities. This reduces the demand for euro and thus weakens the euro on the currency market.”

“Even if not much remained of yesterday's EUR-negative shock in the end, the market reaction reminds us that our expectation of rising EUR/USD rates is also based on the euro area not sliding into a recession. Our economists expect the euro area to see growth rates of around 0.3% over the next few quarters. If the situation were to deteriorate significantly, our EUR/USD forecast would be at risk.”

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