The euro area economy is facing stagnation at the end of Q3 and that is rebuffing hopes for an October rate cut by the ECB. Market players only priced in a ~35% probability of that on Wednesday last week. But they have gradually stepped that up in the past few sessions, before running with it today. Currently, traders are seeing a ~77% probability of an ECB rate cut for next month.
That is weighing on the euro with EUR/USD sliding from around 1.1145 to a low of 1.1092 currently.
The pair had previously found some support from key near-term levels on Thursday and Friday last week. But both the 100 (red line) and 200-hour (blue line) moving averages look to be giving way now. And that sees sellers seizing near-term control, placing a more bearish bias in the short-term.
There is some minor support from the Thursday low and weekly pivot last week closer to 1.1073. That will be the next minor support before considering the 1.1000 mark again.
The question now is, have traders gone too far in pricing in an ECB rate cut next month?
Policymakers have been adamant that they would like to wait until December before the next move. Their game plan was to move once every quarter now after having cut in September here.
The PMI report earlier not only highlighted softness in the economy but also dwindling price pressures. Some things to note:
- The overall rate of input price inflation cooled to a 46-month low, with both manufacturers and services providers experiencing an alleviation of cost pressures. With margins under less strain, French firms offered discounts for the first time since February 2021. Price reductions were exclusive to the service sector, although factory gate charges were broadly unchanged since August. (France)
- September data showed a considerable softening of cost pressures across the German private sector at the end of the third quarter. Input price increases in the service sector slowed notably to the weakest in over three-and-a-half years and only just exceeded the long-run average seen before the pandemic. Manufacturing purchasing costs meanwhile fell at the quickest rate for six months, driven down by weaker demand for inputs and lower commodity prices, particularly steel. (Germany)
- The rate of input cost inflation slowed sharply, easing to the lowest since November 2020. Manufacturing input prices decreased for the first time in four months, while service providers posted the weakest rise in their cost burdens for three-and-a-half years. (Eurozone)
If the ECB needs to point to some suggestion that price pressures are easing, they can look to the above. But you have to wonder how much emphasis are they going to keep placing on consumer price inflation still for the time being.
On that front, base effects might complicate things. So, the ECB definitely has a bit of a balancing act to do in the weeks ahead. But for now, market players have already casted their vote.
