Business activity across the euro area has contracted for the first time since late 2024. This unexpected downturn is primarily driven by a slump in the services sector, with the ongoing Iran-US conflict contributing to dampened consumer sentiment.
The contraction places additional pressure on the European Central Bank (ECB) to consider interest rate cuts. Key figures within the ECB will be closely monitoring whether this services sector weakness is a temporary setback or a more persistent trend. A dovish stance may be considered, particularly if inflation eases alongside weakened demand.
Market participants are watching for statements from ECB President Christine Lagarde and Chief Economist Philip Lane regarding potential policy responses. Upcoming Eurostat inflation data will be crucial in determining if falling prices accompany weakening activity, which would bolster the case for a rate cut. Further developments in the Iran-US conflict could also impact consumer confidence and influence the ECB's decision-making.