Euro Firms on GDP Beat, Inflation Next Key Test

Image © European Commission Audiovisual Services

The Euro firmed against the Pound and Dollar following a stronger-than-expected Eurozone GDP print.

The Euro to Dollar exchange rate traded higher on the day at 1.0832 after Eurostat said the Eurozone economy expanded 0.3% quarter-on-quarter in the second quarter of 2024, beating expectations for a 0.2% outcome.

"The Eurozone’s recovery continued at a decent pace in Q2," says Jack Allen-Reynolds, Deputy Chief Eurozone Economist at Capital Economics.

There was a surprise from Germany, where an unexpected contraction of 0.1% was reported in the second quarter, down from Q1's 0.2% growth and defying expectations for growth of 0.1%.

For now, markets are looking through Germany's troubles and focussing on the broader region. Allen-Reynolds says the better-than-expected Eurozone Q2 growth number and other recent data prints "will reinforce ECB policymakers' view that there is no rush to loosen monetary policy significantly."

The Euro to Dollar exchange rate now awaits the release of Eurozone inflation figures midweek, however, the Dollar is likely to remain the dominant driver in EUR/USD direction, with attention firmly locked on the all-important U.S. job report.

"The closely watched U.S. employment report on Friday could significantly influence the Fed's path. Indications of easing inflation might fuel expectations of multiple rate cuts by the Fed this year, beginning in September, thus adding further pressure on the dollar," says Ashish Ghosh, an analyst at currency trading firm iForex.

The odds of a U.S. Federal Reserve rate cut in September are nearing 90%, as investors think the U.S. economy is slowing enough to justify a cut.

However, for Dollar exchange rates, what will matter is the quantum of rate cuts that come after September. Should data encourage markets to raise bets for a deeper path of rate cuts, the Dollar can fall.

Should Friday's job market data print in line with expectations, then the Dollar can stay robust.

"US nonfarm payrolls are the next most meaningful event risk for me. From a playbook/risk perspective, if the payrolls print comes out around 200k, with an unchanged unemployment rate then making a call on the USD, NAS100 and gold is a tough exercise as the macro argument doesn't really evolve," says Chris Weston, Head of Research at Pepperstone.

Weston says it is easier to consider the path of the USD if we see a payrolls print below 170k concurrently with a higher unemployment (U/E) rate and a further moderation in average earnings.

Here, markets would raise expectations for rate cuts, which can weigh on the USD and offer Euro-Dollar another leg higher.