Europe and Japan GDPs More Important Due to Revisions

After August PMI readings were revised lower, investors are looking at upcoming final GDP figures that could be adjusted down.

A Worrying New Normal: GDP Revisions

Usually, the final reading of GDP isn't a material event for the markets because it almost always comes in line with the first and second readings. But lately, the preliminary versions of key data points have been subject to significant revisions as economic conditions shift. That includes the recent downgrade to US Q2 GDP growth and a revision to the upside that allowed Germany to escape a technical recession. Often, these revisions bring preliminary surprise readings back to the initial assessment made by economists. This has been the case recurrently with US NFPs that have repeatedly surprised to the upside, only to be revised lower months later to be closer in line with the initial forecast.

This is the case for the final Eurozone Q2 GDP, which is expected to confirm a 0.3% growth rate, which had initially surprised slightly to the upside at 0.2%. Recently, ECB official Francois Villeroy (France) admitted that the region has been slowing down but rejected the notion of a recession. But a relatively minor revision could put the shared economy dangerously close, with Q1 flat and the prior quarter at -0.1%.

Beyond the Western Hemisphere's Economics

Japan could be a more extreme example of this trend after its Q2 GDP shocked markets last month by nearly doubling expectations at 1.5% compared to 0.8% forecasted by economists. The sudden pickup in Japan's economy - which had yo-yo-ed through the pandemic-inspired recession - caught many analysts by surprise, yielding increased speculation that the BOJ could be more open to hiking as the economy seemed to be picking up. But a downward revision and more in line with economic forecasts could justify the BOJ's strict stance on easing and help erase any of the latest gains in the currency.

With the USD/JPY pushing towards highs not seen since last year, a surprise revision to the downside could complicate the BOJ outlook. A recent series of officials have insisted on the easing policy expected to remain in place until the start of next year. But if the economy is less robust than anticipated, the market could see an opportunity to weaken the currency against authorities' will. On Wednesday, Japan's top currency official, Masato Kanda, tried a verbal intervention, suggesting that all options for supporting the currency were still on the table. But that faded relatively quickly as BOJ easing reigns supreme.

EUR/USD in Pullback Mode Following Wedge

If EUR/USD has completed a wedge pattern at $1.1279, the pullback could continue the two troughs lower, presently at $1.0634 and $1.0515, with a plunge beneath the latter opening up $1.0350. This is due to typical guidelines around wedges, as it is rare to see shallow corrections follow up. However, if the higher trough holds firm, EUR/USD may reverse higher for either an upward pullback towards or past $1.10, a potential range that would stop price action at the yearly top or a continuation of the long-term bullish trend.

Interestingly, EUR/JPY has also recently completed a short-term wedge pattern and hovers over the higher trough. A weaker euro could see the two troughs break simultaneously, adding to the prediction dynamics.

Source: SpreadEx / EURUSD

Key Takeaways

Recent revisions to economic data have been significant, leading investors to pay more attention to final GDP readings as they have affected countries like the US and Germany, often bringing surprise readings back in line with initial forecasts. In the case of Eurozone Q2 GDP, a minor revision could get the region dangerously close to a recession. Japan also experienced a surprise pickup in its economy, with a downward revision potentially justifying the BOJ's strict stance on easing and impacting the currency.