Euro Recovery May Only Be Possible On Strong Q2 GDP

The Euro’s decline versus the US dollar was fast and furious last week, as the currency fell roughly 3.5 percent and below key support at the 200 SMA. With overnight index swaps now pricing in one 25bp rate cut within the next 12 months, Euro-zone economic data will become even more crucial to interest rate expectations and thus, the Euro.

Euro Recovery May Only Be Possible On Strong Q2 GDP

Fundamental Outlook for Euro: Bearish

- European inflation risks rose as Euro-zone producer prices surged a record 8.0 percent in June
- Meanwhile, European economic growth deteriorates as Euro-zone retail sales falls 0.6 percent
- The Euro tanked on Thursday following the European Central Bank rate decision, Trichet’s dovish commentary

The Euro’s decline versus the US dollar was fast and furious last week, as the currency fell roughly 3.5 percent and below key support at the 200 SMA. With overnight index swaps now pricing in one 25bp rate cut within the next 12 months, Euro-zone economic data will become even more crucial to interest rate expectations and thus, the Euro.

This week, Euro-zone industrial production is forecasted to rise 0.1 percent June after plunging 1.9 percent during the month prior. However, with recent manufacturing PMI reports reflecting a slight contraction in output during that period, industrial production could actually be a bit disappointing.

Later in the week, Euro-zone CPI for July and Q2 GDP will be released at the same time. CPI is anticipated to accelerated to 4.1 percent from 4.0 percent, which is well above the ECB’s 2.0 percent target. Yet, it is worth noting that ECB President Trichet turned his attention to the downside risks to growth for the region last week, giving traders a reason to as well. Euro-zone GDP is forecasted to have contracted by 0.2 percent, pulling the annual rate of growth down to a more than 3-year low of 1.5 percent. The release of German GDP at 2:00 EDT on the same morning will be the best leading indicator, though, and expansion in the Euro-zone’s largest economy is anticipated to have contracted a whopping 0.8 percent for the quarter, the worst reading since Q1 1993. Clearly, economic data out of the Euro-zone points toward additional downside risk for the Euro. However, if Q2 GDP managed to eke out a positive quarterly reading, the surprise factor alone could help lift the beleaguered currency late this week. – TB

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