This morning’s rather disastrous eurozone PMI figures suggest that the market continues to under-price the chances of back-to-back ECB cuts, with the EUR OIS curve discounting just a one-in-three chance of another 25bp cut in October.
Not only did the composite output gauge plunge to an 8-month low 48.9, driven by substantial further weakness in the manufacturing sector, the survey also flagged how continued soft demand resulted in an easing in both input and output price pressures, particularly in the services sector, a gauge that ECB policymakers continue to watch closely.
While the EUR has seen sellers in the aftermath, as EUR/USD breaks below the 1.11 handle, and EUR/GBP trades to a 2-year low, further pressure could be on the cards if the ECB were to take a further step in a dovish direction, particularly with the FOMC’s surprising 50bp cut last week giving policymakers a degree of freedom to move more aggressively, if so desired.
In many ways, the current backdrop of essentially at-target inflation, coupled with a rapidly souring economic outlook, suggests that forceful ECB action is much more warranted than that from the FOMC.
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