ECB and US GDP Potential Impact on EURUSD

The ECB is holding rates steady while the US economy is roaring ahead. But will the data lead to the widening interest rate gap between the euro and dollar and push the pair back towards parity?

First, the Decision to do Nothing

The ECB's meeting is broadly expected to be a snoozefest, with the market pricing in virtually no chance of a policy change at the Thursday meeting. After the last time the shared central bank met, it effectively communicated that rate hikes were over and the interest rate would be held at this level for a long time. But, that does leave open some tweaks that could bother the market, such as how to reinvest its different bond programs, what will happen with the bongs bought during the pandemic, and how it plans to keep the diverse range of government bonds from getting too diverse in their yields.

However, the door for policy changes isn't completely shut, and the recent rise in oil prices could bring back inflation worries. The shared economy is on shaky ground, with Germany still forecast to fall into a recession this year. Both of those could keep the euro on a downbeat trajectory unless there is some kind of surprise from the data or the ECB.

The US Just Keeps Growing

The consensus among economists is that the US grew at an annual rate of 4.0% in the third quarter, up from 2.1% in the second. Meanwhile, the Fed's GDPNow forecaster/tracker provides a more upbeat projection of 5.4% annual growth for the quarter. Naturally, a growing economy provides ground for growing inflation, which could keep the pressure on the Fed to raise rates again, particularly in light of headline inflation rising over the last few months. The FOMC will meet next week after the Chairman, Jerome Powell, heavily suggested that there won't be a rate hike at the November meeting.

Several factors are combined to push the US GDP higher, but aren't necessarily sustainable, which means that markets could dismiss the substantial growth in the American economy. US consumers were seen as the main drivers of the expected growth in GDP in the last quarter, but that was likely fueled by credit card debt going over $1.0T, the highest in history. Additionally, the Federal government had postponed expenditures during the second quarter due to the debt ceiling debate. The increased government spending in the third quarter could also contribute to the GDP number being higher.

EUR/USD in Flag Pattern

EURUSD fakeout shy of $1.07 has sent prices plunging under $1.06, increasing the chances of a flag pattern completion. If the lower trendline around $1.055 breaks down, the paid could drop towards $1.05 and the $1.045 swing. Otherwise, reclaiming $1.0618 and $1.0642 in the interim will raise the chances of an extension to the peak of $1.0696, opening up $1.0734.

SpreadEx / EURUSD

Key Takeaways

The ECB is expected to keep interest rates unchanged during its upcoming meeting, signalling a lack of immediate policy changes. However, some areas remain of concern. The recent increase in oil prices and the uncertain economic outlook, including Germany's projected recession, may also affect the euro's performance. On the other hand, the US economy continues to show robust growth, potentially leading to inflationary pressures and increasing the likelihood of a rate hike. However, some factors contributing to this growth may not be sustainable in the long term. So, the question remains whether the ECB and US GDP data will widen the interest rate gap between the euro and the dollar, potentially pushing it closer to parity.