Europe Could Still Avoid a Recession, Technically

ECB has buffeted the Euro speech and surprises in the data ahead of expectations that the third quarter GDP will be confirmed at almost stagnation levels.

Cracks in the ECB Message

The general thrust of most recent commentary from ECB officials has been that it's too early to talk about rate cuts. Apparently, ECB member for Germany Isabel Schnabel doesn't share that view, as she let slip in a Reuters interview yesterday. She acknowledged the talk of a rate cut next year and allowed inflation to reach the point that such a cut could happen by the middle of next year. This was particularly notable as Schnabel is well-known for her traditionally hawkish stance. The market reacted immediately by pricing in more policy easing next year, with futures now pointing to 142bps of cuts as opposed to 130bps before her comments.

The Euro's decline eased just a few hours later with the release of the final PMI figures for the shared economy, providing a surprise revision to the upside. Although PMIs remained below 50 and therefore in contraction across the board, the German final revision in Services PMI to 49.6 from 48.7 prior was notable for its size and how close it was to return to expansion. The "Sick Man of Europe" might be recovering, but other countries are still underperforming. Sentix Investor confidence in the Euro area rose to the highest level since May but remains negative; a continuation of the pattern in the data suggests the economy is improving but is still headed in the wrong direction.

Looking for a Big Surprise

Given the sensitivity of the markets to potential good news out of Europe, tomorrow's final GDP growth rate revision could be of interest. It was initially reported at -0.1%, opening the door to a potential technical recession for the latter half of the year. But a mere higher decimal revision would pull it back out of negative and allow the Euro Area to escape a technical recession this year by the bare minimum. This could provide some additional market optimism, even if the change is small, in a context where the DAX hit a new record high while economic indicators point to Germany heading into a technical recession.

Whether or not the revision would change the outlook for ECB cuts next year is a different question. Despite suggesting the conditions for a cut might be met soon, Schnabel insisted that a prolonged recession is unlikely and expected an economic recovery. This indicates that a minor change in the trajectory of GDP numbers might not sway the debate on policy within the ECB. Even her German colleague, Bundesbank President Joachim Nagel, was most recently still discussing the possibility of a hike. A surprise in the shared economy's GDP figures could do more to liven the debate among ECB members but potentially not have as much impact on the trajectory of monetary policy.

EURUSD in Downward Impulse

With the EURUSD under continued pressure, breaking $1.07 will likely increase short bets towards $1.063, pending clarity on $1.0516. Conversely, holding a grip of $1.0757 could offer at least a bounce, with only $1.0853 reopening the door to $1.10+. While trading under $1.09 or so, the downside leg off the peak remains a bearish impulse, with upside moves seen as mere pullbacks unless the trend does not decelerate back within the upward base channel.

Source: SpreadEx / EURUSD

Key Takeaways

Despite the general sentiment that it is too early to discuss rate cuts, ECB member Isabel Schnabel suggested the possibility of a rate cut next year, with the market moving into pricing in more easing. However, the decline in the Euro was eased by better-than-expected PMI figures for the shared economy. The upcoming revision of EA's GDP could be significant as it might help the Euro Area avoid a technical recession this year, potentially flaring up debates at the ECB.