(Bloomberg) — The euro fell to the lowest level in two years as traders bet the European Central Bank will have to cut interest rates aggressively to bolster the region’s economy.
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The single currency fell more than 1% to $1.0335, the weakest since November 2022 after data showed 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%, from about 15% 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 Donald Trump has further muddied the outlook for the region, with traders betting the currency could slide toward $1.
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,” he added.
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.
“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.
The two-year German bond led gains, sending the yield down 13 basis points to 1.98%, 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.