Last week, the EURUSD bumped over the 1.1500 handle for the first time since mid-June and generally trended sideways since then. There has been little in the way of notable Eurozone data this week, so the focus has been on the dollar side. But there are some important fundamental observations about the EURUSD outlook from the Euro side.
One of the important factors driving the price action over the last couple of days was the beat in Eurozone Q2 GDP. Markets were expecting the economy to grow just 0.2%, but it doubled that a 0.4%. Inflation was higher than expected as well. Who wasn’t surprised by the data? The ECB. In the minutes of its previous meeting, the central bank anticipated that the poor reading in in the first quarter was due to transitory regional issues and that it would rebound. This is crucial for the EURUSD, because it’s the basis for the ECB’s more hawkish outlook.
So, Oil Is Not A Problem?
One of the reasons that economists excepted the Euroarea economy to underperform is pressure from higher energy prices. Higher Brent should have ment that the EU spend more to import energy, and higher costs would weigh on economic growth. However, Europe’s push into renewables seems to finally being paying off, as the bloc had to import less fuel than anticipated.
In fact, a quick look over the regional production figures shows that areas with more solar and wind saw larger economic growth than areas where traditional energy sources are more dominant. The hotter than expected temperatures in June contributed to increased solar production, particularly in Spain, which helped offset energy costs from imports. The increased trade surplus added to the economy.
Is the Market Reading Too Much Into the Data?
However, the impact is relatively small when compared to prior quarters. It’s not so much that renewables increased the economy, but that the negative impact from the war was not as much as economists had anticipated. And that could be explained more by most major energy contracts being long-term, and unaffected by the bump higher in spot prices.
Another factor in the results that was anticipated by the ECB specifically was that smaller economies like Ireland significantly outperformed central ones like Germany and France. In fact, Ireland’s Q2 growth is responsible for one decimal of the Eurozone’s growth. One-off performance related to the pharmaceutical and technology sectors helped offset the impact from higher fuels.
How This Could Cap the Euro
The notable aspect is in where the outperformance beat expectations, and that was with Germany and France seeing solid export growth. The weaker Euro, particularly in June, helped support exports and disincentivized imports, contributing significantly to the Eurozone’s economy.
The ironic aspect, therefore, is that the bump up in the Euro this week is likely to reverse the gains in the economy that justified the bump. The ECB did not mention a weaker currency supporting the economy, and is expected to raise rates in the coming meetings to deal with inflation. That would also help support the Euro, but at the cost of slowing the economy, the thing that is supporting the Euro. If a stronger currency weighs on exports and the economy in July, then the Euro could face headwinds in the second half of the year.
