Investing.com – Citigroup has doubled down on its bearish stance, citing recent disappointing data on European economic activity.
Data released earlier this week showed business activity in the eurozone contracted sharply this month.
The preliminary index of HCOB, compiled by S&P Global, fell this month to 48.9 from 51.0 in August, falling below the 50 mark that separates growth from contraction for the first time since February.
The downturn appeared to be broad-based: Germany, Europe’s largest economy, saw the decline deepen, while France, the bloc’s second-largest economy, shrank again after the Olympics in August.
Citing downside risks to eurozone growth, the bank said manufacturing remains a drag, while one-off boosts to the services sector (e.g. the Olympics) may be reversing.
“While the manufacturing slump is a global problem, the US remains more insulated than Europe,” Citi said. “As markets bring forward Fed cuts following September’s FOMC, we think the focus may shift to whether the ECB is falling behind the curve, especially if European data continues to weaken amid initial claims in the US stay low.”
The backdrop is also one in which US election risk should reemerge as a headwind for the EUR; Polls in the swing state are tight (we expect a premium of over USD to be paid) and the next US jobs report isn’t due until October 4.
“We remain short EUR/USD, both in spot and options,” said Citi, which uses a spot reference rate of 1.1112 as a ceiling.
At 07:35 ET (11:35 GMT), EUR/USD rose 0.1% to 1.1122.
