The euro hits a two-year low! Economic data is bleak, and expectations for a 50 basis point rate cut by the European Central Bank in December surge

On Friday afternoon, the euro fell to its lowest level in two years. Traders expect Trump's broad global tariff plan to hit EU growth and force the European Central Bank to cut interest rates more aggressively.

The eurozone PMI data released in the afternoon was exceptionally bleak: in November, business activity in the eurozone declined again, with both services and manufacturing PMIs entering contraction territory, and the services sectors in Germany and France accelerating their decline.

After the data was released, the euro fell more than 1% against the dollar to $1.0335, the lowest level since November 2022. Currently, the euro is trading at $1.0411. Market bets on the European Central Bank cutting rates by 50 basis points next month surged significantly, with the probability jumping from around 15% yesterday to over 50%.

Matthew Landon, a global market strategist at JP Morgan Private Bank, stated:

“This report indeed puts a 50 basis point rate cut on the table, betting on the euro as the company’s ‘preferred short’ trade in the forex market.”

Euro Hits Two-Year Low, Analysts Expect Euro to Dollar Exchange Rate May Fall Below Parity

Over the past three months, the euro has been one of the worst-performing currencies among the G10. Markets are concerned that Trump, after taking office as U.S. President, may impose severe tariff strikes on the eurozone's export-dependent economies.

Some analysts also believe that amid the tense Russia-Ukraine relations, the decline of the euro is also a response to the worsening geopolitical situation in Europe.

Chris Turner, global markets head at ING, stated that rising natural gas prices have raised concerns about eurozone commodity trade and the chain reaction between euros.

In its outlook for the global currency market in 2025, Goldman Sachs believes that the euro against the dollar will weaken further next year and may even fall below parity. In the short term, eurozone policymakers may adopt loose monetary policies to respond to tariff shocks, which will further depress the euro exchange rate.

Kristoffer Kjaer Lomholt, head of forex research at Danske Bank, stated that the euro is “under tremendous pressure”:

“The PMI report has triggered widespread market concerns about the cyclical outlook for the eurozone and the prospects for European Central Bank easing.”

Will There Be a Significant Rate Cut in December?

Now, with the eurozone economy trapped in “stagflation,” policymakers must decide whether to accelerate easing in the face of worsening economic headwinds.

On Friday, European Central Bank Governing Council member Mario Centeno stated that eurozone inflation has reached its target, but the economy faces challenges. He tends to favor a gradual and stable approach to rate cuts

"But in the case of an economic downturn, a larger rate cut can be discussed."

On the same day, European Central Bank Vice President Luis de Guindos stated that the central bank is clearly on the path of rate cuts, but the path of rate cuts is more important than the magnitude of the cuts.

"If our inflation forecast for next year indeed materializes, then the monetary policy path is clear. Whether we cut rates by 50 basis points or 25 basis points is less important."

The market generally expects that the European Central Bank will implement its fourth rate cut since June at its last monetary policy meeting of the year in December. According to the implied levels in the swap market, the ECB is currently expected to cut rates by 25 basis points at each of its next four meetings. Rate traders expect a total cut of 150 basis points by the end of 2025.