Recent releases of weak Eurozone PMI data, particularly from France and Germany, have heightened concerns about the region's economic outlook and complicated the European Central Bank's (ECB) monetary policy path. According to Commerzbank’s Dr. Vincent Stamer, the decline in the composite PMI signals a weak second quarter for the Eurozone economy, with companies facing rising input costs and passing some of these costs onto customers. This situation presents a dilemma for the ECB, which must balance the need to curb inflation with the risk of further weighing on already fragile economic conditions. Commerzbank currently expects only a 25-basis-point rate hike by the ECB in June, but warns that a prolonged or escalating conflict in the Persian Gulf, particularly if the Strait of Hormuz remains closed, could keep energy prices elevated and force the ECB into multiple hikes even as corporate conditions deteriorate further [1].
Rabobank's Senior FX Strategist Jane Foley echoes these concerns, noting that the weak French and German PMI data have undermined Eurozone growth expectations and led markets to question the extent of further ECB tightening. The preliminary May composite PMI for France dropped sharply to 43.5 from 47.6 the previous month, marking a 66-month low typically associated with recession. The EUR/USD reacted negatively, briefly dipping below 1.16 following the data release. Market pricing currently reflects just over 50 basis points of ECB policy tightening over the next six months. Rabobank sees risk of only one 25-basis-point ECB hike this year, with further reductions in rate hike expectations likely to undermine the euro's value. Foley also highlights that ongoing energy-related headwinds and the absence of positive news regarding a peace deal in the Iran war could push EUR/USD towards the 1.15 area, with the US dollar benefiting from safe haven flows. Even with a gradual reopening of the Strait of Hormuz, Rabobank does not expect EUR/USD to reach 1.20 in 2024 due to slower Eurozone growth [2].
Both sources emphasize the significant impact of geopolitical developments in the Persian Gulf on the ECB's policy trajectory and the euro's performance. While Commerzbank warns of the potential for multiple rate hikes if energy prices remain high, Rabobank suggests that the risk is skewed towards fewer hikes, with the euro remaining under pressure from weak growth and persistent uncertainty [1][2].
CONCLUSION
The combination of weak Eurozone PMI data and ongoing Persian Gulf tensions has led both Commerzbank and Rabobank to expect limited ECB rate hikes, with only a 25-basis-point increase likely in the near term. Market sentiment towards the euro remains negative, with further downside possible if energy prices stay elevated and growth remains weak.