- Despite the weakness of the US dollar since the US interest rate cut last week, the EUR/USD failed to break the important resistance level of 1.1200 and is stable around 1.1130 at the time of writing the analysis.
- The euro’s losses against other major currencies, especially the US dollar, came amid a contraction in business activity in the eurozone in September, raising fears of a recession.
According to the results of the economic calendar, business activity in the eurozone contracted unexpectedly in September, indicating worsening problems in both the services and manufacturing sectors. According to the announcement, the region’s Purchasing Managers’ Index (PMI), compiled by S&P Global, fell to 48.9 from 51.0 in August, recording the first contraction since February.
The decline, driven by weak demand and economic challenges in major economies such as Germany and France, raises serious concerns about future growth prospects and heightens speculation about possible policy easing by the European Central Bank. The PMI’s fall below the critical 50 threshold highlights deteriorating economic conditions across the eurozone. The services PMI fell sharply from 52.9 in August to 50.5 in September, while the manufacturing PMI fell to 44.8 from 45.8. Germany, the region’s largest economy, was particularly hard hit, contracting by -0.1% in the second quarter and facing further declines in the third. Economists are warning that a technical recession, defined as two consecutive quarters of negative growth, is increasingly likely. Germany’s struggles reflect a broader trend, with France also slipping into recession after a temporary Olympic-led growth spurt earlier in the year. The broad-based weakness in the eurozone, coupled with easing inflation pressures, paints a picture of a fragile economic outlook for the months ahead.
In the services sector, which had previously shown relative resilience, the September PMI pointed to a significant slowdown, falling to 50.5, below all expectations. Firms are seeing a sharp decline in new orders, with the new business index falling to 47.2 – the fastest rate of contraction in eight months. Despite the easing in price pressures, analysts suggest that the European Central Bank may need to implement more aggressive interest rate cuts to stimulate demand. Furthermore, some expect that further deposit rate cuts could be introduced as soon as October to mitigate the economic slowdown.
European manufacturing continues to face challenges
Meanwhile, manufacturing in the eurozone continues to face severe challenges, as evidenced by the PMI’s fall to 44.8, its lowest level since early 2023. This marks the 26th consecutive month of readings below 50, indicating sustained contraction. The September output index fell to 44.5, with business optimism falling sharply as the future output index fell to an 11-month low of 52.0. Moreover, This continued weakness raises concerns about the potential lack of stability in demand and the ongoing impact of broader macroeconomic uncertainty on Europe’s factories.
Also, the latest data points to a slight easing in inflation in the eurozone, a major concern for businesses. The services output price index also fell to 52.0, its lowest level since April 2021. While inflationary pressures persist, this development offers some hope to policymakers, prompting several economists to suggest that the European Central Bank could consider cutting interest rates in October.
Overall, business sentiment across the eurozone remains bleak as September’s PMI data has sparked concerns that recent measures by the ECB may not be enough to avoid a prolonged recession. As central banks around the world adjust their monetary policies, Europe finds itself at a pivotal crossroads, where more stimulus is likely to be needed to stabilize growth and restore confidence in the economy.
In contrast, according to licensed trading platforms, the yield on 10-year US Treasury bonds has approached 3.8%, a new three-week high, after the People’s Bank of China’s measures to stimulate its economy boosted market sentiment. Meanwhile, S&P Global’s Purchasing Managers’ Indices continued to signal strong, albeit slower, growth in the US private sector. The expansion was led by the services sector, while contraction in the manufacturing sector deepened. Traders are closely watching comments from Federal Reserve officials to gauge the central bank’s intentions, as well as the upcoming personal consumption expenditure report for insights into consumer strength and inflationary pressures. The probability of another 50-basis point cut in the federal funds rate in November remains at around 47%.
EUR/USD Technical analysis and forecast:
Based on the daily chart attached, EUR/USD is neutral, and bulls will strengthen their control over the trend by settling above the 1.1200 resistance. Consequently, this could encourage bulls to move towards stronger bullish levels. As we mentioned before, the 1.1075 and 1.0885 support levels are the most important to end the EUR/USD bullish expectations. Technically, the currency pair may remain in a tight range until the announcement of the US inflation reading preferred by the Federal Reserve.
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