The Euro is set to be rocked this week with two major data releases that typically shake up the markets. Both US and EU GDP figures are coming out on the same day, which could lead to some market readjustment for the EURUSD. Euro Area flash April inflation figures come out after US PCE, the Fed’s preferred measure for inflation. That could also lead to a reassessment of the currency dynamics.
The issue for the ECB, however, is whether or not to wait to see the impact of the rate cuts so far, or to keep going. The initial assessment that tariffs would be inflationary has changed. Recently, ECB President Christine Lagarde suggested that the trade war may be deflationary, and that the growth outlook for the shared economy might be cut again. If that were the case, the market is likely to expect more easing from the ECB.
Can It Turn the EURUSD Around
The world’s most trade currency pair has largely trended higher this month despite the respective central banks moving in different directions. The ECB cut rates, and is expected to ease further. The Fed is holding steady and there are increasing doubts it will get around to cutting in June. Normally, this would mean the Euro would lose ground against the dollar.
But traders are even more worried about the economic situation, with cash shifting across the Atlantic to Europe. Investors seem to believe that after the EU announced significant spending increases (mostly in the area of defense), and the US was imposing tariffs, growth would be found in Europe. But, now we get the concrete data to see if that’s the case, and markets could react by adjusting flows and affecting the currency pair.
When Will There Be Growth?
Markets reacted with enthusiasm after Germany announced a €500 billion defense spending package. However, the new government still hasn’t taken office (Chancellor-in-waiting Frederich Merz is expected to take the top job on May 8th). Analysts don’t expect the effects of the spending announcements to be seen until later this year at the earliest. In the meantime, the economy is expected to remain sluggish, which could temper upward growth for the Euro.
Individual countries will report their GDP figures in the hours leading up to the Eurozone data, which could allow markets to react ahead of time. French GDP growth is expected to increase to 0.2% from -0.1% prior. A similar expectation is seen from Germany, moving from -0.2% to +0.2%. However, taking all the nations in consideration, the Euro Area Q1 flash GDP growth rate is expected to remain unchanged at 0.2%.
The Deciding Factor for the ECB
Over the next couple of days we get the national preliminary readings for April inflation. Starting with France, where the annual rate is expected to rise slightly to 0.9%. Germany will roll out each one of its states before giving the final number, which could give the market some time to react. Germany’s inflation rate is expected to moderate to 2.1%. Then, on Friday, we get the figure for the whole of the EuroZone, which is expected to see its flash April CPI fall back to target at 2.0% from 2.2% prior. But, the core rate is expected to remain slightly elevated at 2.2% from 2.4% prior.
If inflation comes down even faster, then the ECB could start to worry that inflation will undershoot. A return to the low-growth, low-inflation situation of the pre-pandemic would likely be a headache for the ECB. On the other hand, if inflation remains elevated, that could be just what the hawks need to persuade other members to hold off on a rate cut for one more month.
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