Euro in slight weakness crisis – Commerzbank

The Euro (EUR) suffered a slight bout of weakness on Monday as disappointing Purchasing Managers’ Indexes were gradually released. For France, for Germany and finally for the euro area aggregate. Overall, both sub-indices – for manufacturing and the services sector – were weaker than all analysts polled by Bloomberg had previously expected. For market participants, the smell of recession in the eurozone continues to linger, notes Ulrich Leuchtmann, head of FX and Commodity Research at Commerzbank.

Significant deterioration in the economic situation will weigh on EUR/USD

“The weakness did not last. Europe’s single currency managed to make up for most of the losses rather quickly. However, market jitters when it comes to weak economic data from the Eurozone should be a lesson to us. I would like to remind you once again that these reactions to this kind of news are so strong because they serve two different EUR-negative narratives simultaneously.”

“The market is already expecting very low inflation in the Eurozone. If a recession were to occur, the market would have to assume that inflation would be so low that the ECB would have to act quickly to prevent a return to deflation. This would argue for very rapid ECB interest rate cuts. Further economic weakness in the euro zone would once again reinforce the impression that the euro zone has a sustainable growth problem that has been playing out since the immediate post-pandemic recovery ended. But in such an economic zone, you are less likely to find many profitable investment opportunities. This reduces the demand for the euro and thus weakens the euro in the foreign exchange market.”

“Even though there is not much left of yesterday’s negative euro shock, the market reaction reminds us that our expectations for higher EUR/USD rates are also based on the eurozone not slipping into recession. Our economists expect the euro area to post growth rates of around 0.3% in the coming quarters. If the situation were to deteriorate significantly, our EUR/USD forecast would be at risk.”