Euro Plunges as Grim Business Data Fuels Expectations of ECB Rate Cuts

The euro experienced a sharp decline against the dollar on Monday as recent business activity data painted a gloomy picture of the euro zone’s economic health, heightening expectations that the European Central Bank (ECB) may resort to more policy easing later this year.

The common currency dropped by 0.6% to $1.1096, marking its most significant daily fall in over three months. This move also distances the euro further from the 13-month high reached in late August when optimism about faster U.S. monetary policy easing had bolstered its value.

Euro Zone Business Activity in Sharp Contraction

A recent survey compiled by S&P Global revealed that business activity across the euro zone contracted sharply and unexpectedly in September. The region’s dominant services industry flatlined, and the downturn in manufacturing accelerated, highlighting the challenges faced by the bloc.

The slump appeared to be broad-based, with Germany, the largest economy in the euro zone, witnessing a deepening decline. Meanwhile, France, the second-largest economy in the bloc, slipped back into contraction after the temporary boost it experienced in August, thanks to the Olympic Games.

These troubling figures have prompted traders to anticipate that the ECB will implement more aggressive policy measures in response to the deteriorating economic outlook. Market expectations now suggest a potential cut of around 42 basis points from the ECB this year, up from 38 basis points just last week, signaling a growing belief that the central bank may reduce rates as early as October.

U.S. Dollar Gains Ground

In contrast, the U.S. dollar continued to strengthen, with the dollar index—measuring the greenback against six major currencies—rising by 0.4% to 101.13. This movement follows the dollar’s recovery from the one-year low it hit last week and underscores its position as a safe-haven currency amid global economic uncertainty.

UK Business Activity Shows Resilience

The British pound also experienced a decline, slipping 0.3% to $1.3281; however, it managed to bounce back from its session low. A similar survey in the United Kingdom showed that British business growth slowed this month, but the contraction was less severe than the euro zone’s figures, offering some reassurance about the country’s economic trajectory.

The pound had reached its highest level in over two years against the dollar on Friday following robust British retail sales data. Despite the Bank of England (BoE) holding interest rates steady last Thursday, Governor Andrew Bailey cautioned against cutting rates “too fast or by too much,” signaling a cautious approach to monetary policy.

Dollar-Yen Pair Sees Volatility Amid Japanese Political Shifts

The dollar dipped slightly against the Japanese yen on Monday, trading in thin market conditions due to a holiday in Japan. The greenback had recently touched a two-week high of 144.50 yen, following the Bank of Japan’s (BOJ) decision to keep interest rates unchanged, indicating that it wasn’t in a rush to raise them again.

The BOJ’s decision, coming shortly after the U.S. Federal Reserve’s 50-basis-point rate cut, has caused a temporary halt in the yen’s gains this month, although the currency remains up by about 1.5% in September.

Adding to the uncertainty in Japan is the upcoming ruling party vote later this week, which will decide the country’s new prime minister. This political shift could present a challenge for the BOJ in the months ahead, with a potential snap election expected in late October. The two leading candidates to replace outgoing Prime Minister Fumio Kishida have offered divergent views on Japan’s monetary policy, indicating potential shifts in the country’s economic approach.

Overall, the recent business activity data and policy signals suggest that the euro zone may face significant challenges in the months ahead. With the euro under pressure and the ECB expected to implement more easing measures, the financial markets will be closely watching how central banks in Europe, the U.S., and Japan navigate the current economic turbulence.