The euro (EUR) has continued to trade at weaker levels after the sharp sell-off at the end of last week, said MUFG.

Euro weakness accelerated on Friday after the release of the much weaker-than-expected eurozone PMI surveys for November, wrote the bank in a note to clients. The sharp drop in business confidence provided the trigger for EUR/USD to break below the October 2023 low at 1.0448 which opened the door for a bigger drop to 1.0335 recorded on Friday.

The pair has since retraced most of the move lower on Friday although remains vulnerable to further weakness heading into year-end, stated MUFG.

The release of the latest eurozone PMI surveys for November provided another worrying signal for the outlook for the eurozone economy, pointed out the bank. The composite PMI survey declined by 1.9 points to 48.1 in November. It was the weakest reading since January of this year and casts further doubt on the sustainability of this year's economic recovery.

The breakdown revealed that business confidence dropped sharply in both the manufacturing and service sectors by 0.8 point and 2.4 points respectively. The country-by-country breakdown revealed that the composite PMI measures fell by 3.3 points to 44.8 in France, by 1.3 points to 47.3 in Germany, and for the rest of the eurozone it fell by 1.6 points to 50.7.

At current levels, the composite PMI survey for the eurozone is pointing towards the risk of renewed economic contraction again at the end of this year, added MUFG. However, the surveys have underestimated economic growth recently.

In Q3 the composite PMI averaged 50.3 down from 51.6 in Q2 yet economic growth picked up to 0.4% quarter over quarter in Q2 from 0.2% quarter over quarter in Q2. It was the strongest quarter of growth since Q3 2022.

It will provide some reassurance that the scale of weakness in the latest PMI surveys doesn't necessarily mean that the eurozone economy is likely to contract again in Q4 although the weakening trend is concerning. The United States election result likely contributed to the sharper drop in business confidence in November by heightened concerns over disruptive trade policies under President-elect Donald Trump, noted the bank.

European Central Bank officials speaking last week continued to stick to dovish policy rhetoric signaling another rate cut was very likely at the next policy meeting in December even before the release of the weak PMI surveys for November, added MUFG. The eurozone rate market has since gone one step further by moving to price back in a higher probability of the ECB delivering a larger 50bps rate cut in December or January.

There are currently around 37bps of cuts priced in by December and 71bps of cuts by January. So far there has been strong indication from ECB officials that they are actively considering delivering a larger 50bps cut as soon as next month. The ECB may want to see the weakness in the business surveys replicated in the hard economic activity data as well before delivering a larger 50bps cut especially after the recent wage data from the eurozone for Q3 picked up significantly to fresh cyclical highs although it has been downplayed as a lagging indicator, noted the bank.

MUFG isn't yet convinced a larger 50bps cut will be delivered as soon as next month although that could become more likely early next year when ECB officials could have more clarity over Trump's tariff plans.