The Eurozone’s preliminary HCOB Composite PMI fell to 47.5 in May from 48.8, versus expectations of 48.8. Readings below 50.0 indicate contraction in business activity.
Manufacturing PMI eased to 51.4 from 52.2, compared with a forecast of 51.9. Services PMI dropped to 46.4 from 47.6.
Eurozone Activity Signals Deeper Contraction
Survey data cited two straight months of falling output, with the fastest decline in just over two-and-a-half years. The data also point to a 0.2% fall in the euro area economy in the second quarter.
After the release, EUR/USD recovered to about 1.1616 from an intraday low of 1.1595. The Euro is used by 20 EU countries and in 2022 made up 31% of foreign exchange trades, with average daily turnover above $2.2 trillion.
EUR/USD accounts for about 30% of FX transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%). The ECB holds eight policy meetings per year and targets inflation at 2%, using interest rates as its main tool.
The four largest euro area economies account for 75% of output. Trade balance figures can also affect the Euro’s value.
Market Implications For Ecb Policy And Eurusd
The latest business activity numbers for the Eurozone show a significant slowdown, with the Composite PMI dropping to 47.5. This indicates the economy is contracting at its fastest pace in over two and a half years. We believe this sets the stage for a potential 0.2% economic decline in the second quarter, putting pressure on future growth.
This weakness makes it much harder for the European Central Bank to consider raising interest rates. This data increases the probability that the ECB will need to adopt a more dovish tone or even signal future rate cuts to support the economy. When looking back, we saw the ECB pivot quickly towards easing when faced with a similar slowdown in early 2025, a pattern that is likely to repeat.
We saw the Euro bounce to near 1.1616 against the Dollar, but this appears to be driven by temporary US Dollar weakness, not any fundamental strength in the Euro. This creates a potential selling opportunity, as the underlying economic picture for Europe is negative. A strategy of buying EUR/USD put options could be effective, allowing traders to profit from a fall in the currency over the next several weeks.
Supporting this bearish view, the latest Eurostat flash estimate for May showed Harmonized Index of Consumer Prices (HICP) inflation slowing to 1.9%, falling below the ECB’s target for the first time in over a year. Additionally, recent data showed German factory orders fell by 1.2% in April, highlighting weakness in the manufacturing core of the Eurozone. This combination of slowing growth and cooling inflation strengthens the case for a weaker Euro.
