Eur/usd: After worrying economic indicators, the euro falls to a two-year low against the dollar

(BFM Bourse) – The euro zone currency is falling against the greenback and fell this Friday following disappointing PMI indices. The euro thus continues its fall that began more than a month ago against a dollar in great shape.

The euro continues its tumble against the dollar. The euro zone currency fell 0.44% against the greenback this Friday around 11:30 a.m., to $1.0428. According to data from investing.com, the European currency fell as low as $1.033 during the session, which is its lowest since the end of November 2022.

The fall of the euro was abrupt and took place after the publication of a wave of disappointing indicators. Germany's gross domestic product in the third quarter increased by 0.1%, the statistics agency Destatis announced in a second assessment. Which is less than the 0.2% of the agency's first estimate.

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PMIs clearly below expectations

Importantly, PMIs, leading indicators of private sector activity, showed surprising weakness. The composite PMI, which brings together services and manufacturing, fell to 48 in November, according to S&P Global, after an index of 50 last month. This is a ten-month low.

Above all, this decline had not at all been anticipated by economists who were counting on an index of 50, a figure which marks the border between an expansion and a contraction of activity.

“The development of the eurozone economy could hardly be more unfavorable. While the manufacturing industry plunged into recession in November, the services sector recorded a contraction in its activity after two months of marginal growth” , commented Cyrus de la Rubia, chief economist at the Hamburg Commercial Bank, which produces the data on these indices with S&P.

“However, this is not surprising given the current political situation in the region's two main economies: the French government lacks stability while early elections have been announced in Germany. The recent election of Donald Trump as president of the United States further exacerbating the climate of uncertainty, the weakness of the economic situation is not surprising: companies are forced to navigate by sight”, he explained.

“The sharp drop in the euro zone composite PMI index in November suggests that the economy is losing momentum in the fourth quarter,” underlines Capital Economics.

Parity in sight

This deleterious economic data has caused bond yields of eurozone countries to fall, as the market understands that the European Central Bank now has greater scope to cut rates. The yield on Germany's 10-year debt security lost 6.3 basis points (0.063 percentage points), to 2.257%, while that of the same maturity on France dropped 5.2 percentage points, to 3 .05%.

These lower rates in turn cause a fall in the euro (the higher the rates, the stronger the demand for a currency, all other things being equal).

The euro's new bout of weakness accentuates its decline against the dollar. Since the beginning of October, the European currency has suffered, losing 7% against the greenback. This is because the market anticipated (rightly) the victory of Donald Trump in the American presidential election.

For multiple reasons, the policy desired by the elected American president is perceived as favorable to the dollar and therefore unfavorable to the euro. First of all because, although inflationary, it is supposed to amplify growth in the United States, which would support the American currency. Then because the increase in customs duties desired by the businessman, particularly vis-à-vis China, risks harming other international currencies.

Donald Trump's agenda incorporates “a realistic possibility of US tariffs of 60% or more on China and across-the-board tariffs of 10% or more, increasing the chances that ex-US dollar currencies will depreciate through against the greenback to anticipate the loss of competitiveness on American markets implied by customs duties”, explains UBS.

So much so that several research offices estimate that the euro could fall below parity next year. This is the case of Capital Economics, which sees the euro worth 1 dollar or less “by the end of 2025”.

For Deutsche Bank, “if the Trump agenda is implemented quickly and in full force, without a countervailing political response from Europe or China, we could see the Eurodollar fall through the parity until 'at 0.95 or even below'.

Julien Marion – ©2024 BFM Bourse