The Eurozone is confronting a severe "stagflation" threat as recent economic data reveals a sharp slowdown in growth alongside surging inflation, placing the European Central Bank in a difficult policy position.
According to preliminary data from S&P Global, the Eurozone's composite Purchasing Managers' Index (PMI) fell to 50.5 in March, down from 51.9 in February, marking a 10-month low and barely remaining above the 50-point threshold that separates expansion from contraction. The services PMI dropped significantly to 50.1, well below expectations, while the manufacturing PMI unexpectedly rose to 51.4, a 45-month high. This divergence highlights the uneven impact of Middle East conflicts, which are driving up energy costs and disrupting supply chains.
S&P Global's chief business economist, Chris Williamson, stated that the March PMI data is sounding a "stagflation alarm," with the war substantially increasing prices while restraining growth. Business costs are rising at the fastest pace in over three years, driven by energy, fuel, transportation, wage increases, and raw material expenses. Supply chain pressures are also intensifying, with maritime disruptions and delays in deliveries from Asia becoming more evident. Business expectations for future output have declined at the sharpest rate since the onset of the Russia-Ukraine war, reflecting deep pessimism about the economic outlook.
Germany and France, the Eurozone's two largest economies, showed contrasting trends. Germany's composite PMI fell to 51.9, still in expansion territory, with manufacturing strength partly attributed to clients stockpiling to avoid war-related supply risks. In contrast, France's composite PMI dropped to 48.3, falling below the 50-mark for the third consecutive month and indicating a contraction. French business confidence has weakened significantly due to rising inflation threats and persistent supply-side disruptions.
The European Central Bank is now in a wait-and-see mode, grappling with inflation pressures stemming from the Middle East situation and uncertainty over potential U.S. policy shifts. Market expectations have shifted, with traders now pricing in about 70 basis points of interest rate hikes by the end of the year. Officials have not ruled out a rate increase at the April policy meeting.
In the United States, business activity growth also slowed in March, with the composite PMI falling to an 11-month low of 51.4. The services sector was the main drag, while manufacturing showed resilience. Input costs and selling prices rose at the fastest pace in months, raising concerns about stagflation risks. Employment declined for the first time in over a year, reflecting corporate caution amid economic uncertainty.
Geopolitical tensions continue to escalate, with the U.S. and Iran remaining far apart on key issues such as nuclear program limits and control of the Strait of Hormuz. Military actions persist, and the conflict has expanded to involve Lebanon, further complicating the regional stability.
Technically, the EUR/USD pair is trading in a narrow range, with key resistance near 1.1640 and support around 1.1560. While short-term momentum appears slightly positive, the pair remains vulnerable to geopolitical developments and shifting expectations for Federal Reserve policy.