This week is packed with economic data that could move markets, with EUR/USD among the most exposed currency pairs. Several US events are likely to influence the dollar early in the week, while major Eurozone releases later could shift the pair in the opposite direction. As a result, traders could see sharp swings as US data pushes the pair one way before European data changes direction.
Key Eurozone Events
The main Eurozone releases arrive later in the week. Quarterly GDP figures are due on Thursday, followed by the flash Eurozone CPI report on Friday. Both reports are likely to shape expectations for the ECB’s September policy meeting.
ECB Remains Focused on Inflation
At last week’s policy meeting, the ECB reinforced its hawkish stance and strongly signalled another rate hike in September. Officials took this position even though the Eurozone economy contracted during the first quarter. The ECB expects that weakness to prove temporary and believes the economy recovered during the second quarter.
If the economy contracts again, the Eurozone will enter a technical recession. That outcome would make it much harder for the ECB to justify another rate hike. Officials would have to balance weaker growth against persistent inflation. Even so, markets do not always react in a straightforward way. Weak GDP could still support the Euro if traders believe the slowdown is already priced in. Stronger growth would also support the currency because it would give the ECB more room to tighten policy.
What Markets Expect
Analysts expect Eurozone GDP to grow by 0.1% in the second quarter after a 0.2% contraction in the first quarter. Even zero growth would allow the economy to avoid a technical recession and keep the ECB on track for a September rate hike.
Traders will watch closely for signs of economic weakness. A softer reading could pressure the Euro if it changes expectations for future ECB policy.
On Friday, markets will focus on the flash July Eurozone CPI report. Economists expect annual inflation to rise to 3.0% from 2.8% in June. Higher energy prices following renewed fighting in the Middle East are expected to drive the increase. Core inflation, which excludes food and energy, is expected to remain steady at 2.4%.
What Could Weaken the Euro
GDP data is less likely to weaken the Euro unless it delivers a major downside surprise. Inflation data could have a greater impact.
If inflation rises more than expected while economic growth remains weak, traders may sell the Euro. That combination would force the ECB to keep policy tight while the economy struggles to expand.
Market reaction will also depend on events in the United States. The Federal Reserve’s policy decision and several key US economic reports arrive before the Eurozone data. If the Fed maintains a hawkish stance, the dollar could strengthen before Thursday and Friday. That would leave EUR/USD under pressure heading into the second half of the week.
