EUR/USD Drops as Eurozone PMI Hits 48.9, Signaling Escalating Recession Fears

Eurozone Business Activity Contracts in September

Eurozone business activity contracted more than expected in September, marking a significant shift in the region’s economic outlook. The decline in both the services and manufacturing sectors raises concerns of an impending economic slowdown. The Purchasing Managers’ Index (PMI) data released today highlighted a broad-based downturn, with Germany and France leading the contraction.

The EUR/USD weakened on the news continuing the plunge triggered after the release of German PMI data earlier. At 08:27 GMT, the single-currency is trading 1.10906, down 0.0069 or -0.62%.

Composite PMI Falls Below Expectations

HCOB’s preliminary composite eurozone PMI, compiled by S&P Global, dropped to 48.9 in September from 51.0 in August. This marked the first contraction since February, with the index falling below the 50-point threshold that separates growth from contraction. Economists had expected the index to only dip to 50.5, according to a Reuters poll.

The unexpected contraction points to weaker demand across the eurozone, with new orders falling at the fastest rate in eight months. The new business index dropped to 47.2 from 49.1, further highlighting the severity of the slowdown. Chief Economist at Hamburg Commercial Bank, Cyrus de la Rubia, commented, “It doesn’t take much imagination to foresee a further weakening of the economy,” given the declining order backlogs and new business figures.

Services Sector Weakens

The services sector, which had been holding up better than manufacturing, also showed signs of strain. The services PMI declined sharply to 50.5 from 52.9, missing forecasts of 52.1. This indicates that the bloc’s largest sector is now close to stagnation. While inflationary pressures in services have eased, with the output prices index falling to 52.0 from 53.7, this has done little to offset the broader downturn.

De la Rubia added, “With the ECB closely watching the persistently high inflation in services, the news that both input and output price inflation has slowed down is certainly welcome.” However, this slowdown in inflation has not been enough to revive business activity.

Manufacturing Continues to Struggle

Manufacturing in the eurozone remains deep in contraction, with the PMI for the sector dropping further to 44.8 from 45.8. The output index also fell to 44.5, underscoring continued challenges for factories. Business optimism within manufacturing hit an 11-month low, with the factory future output index plunging from 57.5 to 52.0, reflecting low expectations for a recovery in the near term.

Germany, the eurozone’s largest economy, continues to bear the brunt of the manufacturing downturn, while France, after a temporary boost from the August Olympics, has slipped back into contraction.

Market Forecast: Bearish Outlook

Given the unexpectedly sharp contraction in business activity and declining optimism, the eurozone’s near-term economic outlook appears bearish. The PMI data points to weakening demand across both services and manufacturing, and the European Central Bank’s recent interest rate cut may not be enough to counteract this trend. With new orders declining rapidly and manufacturing showing no signs of recovery, the eurozone economy is likely to face further stagnation in the months ahead. Traders should prepare for potential downside risks as the region grapples with both persistent inflation and slowing growth.