06:55 AM EDT, 09/24/2024 (MT Newswires) -- Fresh policy stimulus in China has provided welcome news for the euro given the eurozone economy is more tightly linked through trade to demand from China than the United States, said Mitsubishi UFG.

It comes at a time when the eurozone economy appears to be slowing after the pick-up in growth in the H1 of this year, wrote the bank in a note to clients. The release Monday of the latest PMI surveys from the eurozone for September revealed that business confidence continued to deteriorate more quickly than expected in Q3.

The composite PMI for the eurozone fell back below the 50.0 level in September to 48.9 from 51.0 in August. It was the second consecutive monthly drop and takes it further below the high set in May at 52.2. It suggests that the eurozone economy could be struggling to grow again in the final quarter of this year, stated MUFG.

Weakness in business confidence was mainly driven by France and Germany who recorded composite PMI readings of 47.4 and 47.2 respectively. One positive from the PMI surveys was that inflation pressure in the services sector appears to have eased further. The prices charged component declined to 52.0 in September from 53.7 in August.

The softer PMI surveys have encouraged speculation that the European Central Bank will speed up the pace of rate cuts in response to the loss of growth momentum in the eurozone, according to MUFG. The weak PMI surveys add to concerns that the ECB's policy rate is still too tight and risks snuffing out the nascent economic recovery in the eurozone.

While the ECB indicated at this month's policy meeting that it's more likely to wait until December to cut rates again when it will have more data on the performance of the eurozone economy in Q3 available, eurozone rate market participants have been encouraged by the weak PMI surveys to more fully price in another 25bps rate cut as soon as next month, pointed out the bank.

Even if the ECB decides to skip cutting rates again in October, market participants are likely to anticipate that it is only a matter of time before the ECB has to speed up rate cuts by delivering a larger 50bps in December, added MUFG. The negative development will help to put a dampener on further upside for the euro against the US dollar and have reinforced the euro's weakening trends against sterling and yen.