The euro fell to its lowest level in two years, and traders are betting that the ECB will have to cut interest rates sharply to boost the local economy.
After Friday's data showed that business activity in the Eurozone's two largest economies contracted beyond expectations, the euro fell more than 1% against the US dollar, hitting its lowest level of 1.0335 since November 2022. The implied market probability that the ECB will cut interest rates by 50 basis points next month jumped to more than 50% from around 15% on Thursday.
“This report really makes it possible to cut interest rates by 50 basis points,” said Matthew Landon, a global market strategist at J.P. Morgan Chase Private Bank. Shorting the euro is the company's favorite trade in the foreign exchange market.
Traders are increasingly betting that EUR/USD will fall to parity, and this has only happened twice since its inception in 1999. The options market has paid a premium to hedge against further losses and is close to the highest level in five months.