BNY highlights a broad Eurozone PMI downturn, with the composite back in contraction and services particularly weak, while producer prices and input costs re‑accelerate. The bank notes markets assume ECB policy cannot diverge much from peers, a view it challenges. Softer demand and early ECB tightening could see the Euro underperform on a relative‑value basis versus other currencies.

Soft data, sticky prices pressure Euro

"For now, the ECB is the only Western European central bank clearly on course to tighten, and the market appears to believe that policy gaps between the ECB and peers cannot widen significantly."

"If markets take the view that inhibiting hikes due to softer demand is the right way forward, the EUR may weaken on a relative-value basis against peers and greatly reduce pass-through risk."

"Eurozone composite PMI for April fell to 48.8 points from 50.7 in March, marking a 17-month low and signaling a return to contraction for the first time in almost one-and-a-half years, while the services PMI declined to 47.6, its weakest level in 62 months."

"At the same time, inflation pressures intensified, with input costs rising to a 40-month high and output prices increasing at the fastest rate in three years, reinforcing stagflation risks."

"Eurozone industrial producer prices rose sharply in March (+3.4% m/m), reversing a 0.6% decline in February, while annual growth reached 2.1%, indicating a renewed pickup in pipeline inflation pressures."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)