Eurozone PMI data deteriorated further in October 2023, even hinting at signs of a recession. As a result, the US dollar regained the upper hand.

The US dollar strengthened rapidly at the beginning of the New York session on Tuesday, October 24th. A series of Purchasing Managers' Index (PMI) from various major countries shows drastic differences in economic performance between the United States, the Eurozone, and the United Kingdom. As a result, EUR/USD fell around 0.7% to 1.0590 while GBP/USD dropped over 0.6% to 1.2170.

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Business manufacturing and service activities in the Eurozone deteriorated further in October 2023, even hinting towards a sign of recession. The Eurozone Manufacturing PMI score slipped from 43.4 to 43.0, despite the expectations earlier hoping for an improvement to 43.7. The Eurozone Services PMI score also declined from 48.7 to 47.8.

Data from Germany revealed the most severe situation among other countries in the Eurozone. Germany's Services PMI score switched from expansion to contraction following the ongoing contraction in Manufacturing PMI since August 2022.

These amounts have significantly impacted the euro. Several long-standing concerns have resurfaced, including the risk of a recession in the Eurozone and potential ECB interest rate cuts.

"The PMI indices have proven to be a reliable indicator of the economic cycle for currency and equity market investors. The latest preliminary estimates for October disappointed, showing a deepening of the recession rather than the expected improvement," says Alex Kuptsikevich, senior market analyst at FxPro.

Alex added that, as in previous interest rate hike cycles following the global financial crisis, the ECB may tighten interest rates earlier than the Fed. This is a significant factor weighing the euro against the dollar as the carry trade reemerges as a market driver.

Jane Foley, head of Forex strategist in Rabobank, also believes that the weakening of the US dollar is likely caused by the weak economy in the Eurozone and Germany compared to the US. Not to mention, some pillars of Germany's success are now less stable compared to before. Several factors contribute to this issue: China's economic slowdown, higher energy prices, and demographic issues in Germany.

On the other hand, UK PMI data showed mixed results. The UK Manufacturing PMI score increased from 44.3 to 45.2, slightly higher than the market estimate of 44.7. Unfortunately, the UK Services PMI score slipped from 49.3 to 49.2. Both are still in contraction, which aligns them with other mediocre economic data from the country.

Lastly, the US PMI data show more robust performance, outperforming S&P Global's assessment. The US Services PMI score increased from 50.1 to 50.9. This is quite surprising, considering the market was concerned about a slowdown to 49.8. The US Manufacturing PMI score also improved from 49.8 to 50.0. That means the business activities in the US have returned to an expansionary status.