Various economic data in the Eurozone are deteriorating, presenting a dilemma for the European Central Bank (ECB) interest rate policy.

The euro has been continuously weakening against the US dollar since mid-July. Today (September 8th), EUR/USD is sitting in the range of 1.0710 and appears to be under continued pressure. This is because the recent deteriorating economic conditions in the Eurozone may likely compel the European Central Bank (ECB) to maintain interest rates during next week's policy meeting.

eurusd today


Yesterday's preliminary report on the Eurozone's Gross Domestic Product (GDP) showed a quarterly growth of only 0.1% in the second quarter of 2023. However, the consensus had expected growth of 0.3%. Year-on-year, Eurozone GDP significantly slowed from 1.1% to just 0.5%.

A few days ago, the Eurozone PMI report also shows disappointing results. The service and manufacturing sectors experienced contraction, as evidenced by the index numbers below 50.0.

The inflation rate in the Eurozone is still more than twice the ECB's target, so the ECB should raise interest rates again. However, some analysts believe that the current worse economic conditions in the Eurozone may force the ECB to postpone the rate hike.

Jeremy Stretch, an analyst at CIBC Capital Markets, said that they expect policy hesitancy due to weak data trends, suggesting a potential in the rate hike decision. He noted that the ECB's reluctance in response to the weak data could lead to a test of the June 8th low at 1.0695 for EUR/USD, with the next support level at 1.0635, coinciding with the May 31st low.

"Stagnation in industry and the broader economy looks like the new normal for Germany – Europe's biggest economy. The full batch of hard German macro data for July suggests that the risk of recession is high again," says George Vessey, FX and Macro Strategist at Convera.

Nevertheless, some analysts believe the ECB will still raise its interest rates to curb inflation. Vessey also acknowledged that the Euro's exchange rate would receive new support if the ECB continues its policy tightening. Current market data indicates almost a fifty-fifty chance of an ECB interest rate hike at the September 14, 2023 meeting.