ECB Hawkish Despite Expected GDP Revision

Europe's final reading of its Q1 GDP figure is expected to be revised lower, but the ECB is seen forging ahead with rate hikes.

GDP Revisions Expected to Show Slower Growth

Typically, the final reading of GDP numbers is a bureaucratic affair with minor changes. But, this time around, Germany's revised numbers pushed the country into a technical recession. The lower figure from Europe's largest economy will naturally lower the Eurozone measure, but not enough to put it in the red. The consensus is that Q1 growth will be revised down from 0.1% to flat, repeating the growth rate from the final quarter of last year. The annual growth rate is expected to be revised down to 1.2% from the 1.3% initially reported. That would be compared to the 1.8% growth registered in the prior quarter.

Slower growth for Europe during the winter wouldn't be a shock since it was broadly expected that the energy constraints and supply chain issues from the war in Ukraine would have a deleterious effect. The initial report was a positive surprise at the time, and a downward revision is seen as reversing back to what was initially expected. Recent economic reports from Europe continue to paint a less than an auspicious picture, with April retail sales flat monthly and falling -2.6% compared to last year (though not as bad as the -3.0% expected).

ECB Keeps Hawkish Stance as GDP Tick Downwards

The consensus is that the GDP figure won't dissuade the ECB from hiking unless there is a significantly larger revision to the downside. The President of the shared central bank, Christine Lagarde, has repeatedly said that she sees inflation as "too high for too long" that rates will keep rising. Even noted doves have not come out to say that the terminal rate has been reached but rather suggest that the rate hikes have gone "most of the way". 

While the consensus remains firm about the June meeting's hike, uncertainty is now on the July meeting. Europe has largely avoided major banking issues, unlike the US, which saw the equivalent of a double rate hike with the increased scrutiny over the banking system since March. With the Fed, so far the most aggressive of the central banks to bring down inflation, expected to pause at the next meeting, it could give the ECB doves an opening. Especially if data coming in for the rest of the month aligns with the lacklustre GDP figures expected tomorrow.

EURUSD in Flag Pattern Until Breakout

EURUSD has found resistance at $1.0779 following a bounce at the regional low of $1.0635, with current price action resembling a potential flag. In the event of a breakdown, prices could slide towards the support of $1.0516 should the lower end of the flag succumbs to pressure, while a rejection could see an acceleration to the upper end near $1.08. Only a break past the tip trendline could offer additional upside, bringing the $1.0846 and perhaps $1.09 into the spotlight.

Key Takeaways

Final Q1 GDP is expected to show slower growth, with Germany's revised numbers resulting in a technical recession, with ECB's Lagarde remaining firm on rate hikes regardless. Europe's winter slump was expected due to energy constraints and supply chain issues, and even though data released during the rest of the month has been lacklustre, ECB is expected to hike rates in June, but uncertainty looms for July.