US GDP, Global PMIs & The EURUSD Outlook

The gap between the US and European economies continues to widen, with the EURUSD shaping up to be one of the losers.

The Good, The Bad...

For those concerned about the effects of inflation, flash PMI surveys from key global economies provided a positive note, particularly for Europe. Price pressures appeared to be easing, but this came at the expense of worse-than-expected manufacturing readings, as French and German industrial indicators fell further into contraction instead of moving towards expansion as had been anticipated. The Eurozone Composite PMI was expected to increase to 51.2 from 50.9 previously, but it declined to barely above the threshold of contraction at 50.1, with decreases in both services and composite.

This news does not really signify any major change for Europe, as the shared economy has been in contraction for nearly two years and is projected to experience only anaemic growth this year. However, it does support the case for the ECB pursuing a second interest rate cut this year. Next week will see the release of GDP numbers, and the PMI indicators suggest the results for the economy will be disappointing. If this trend is confirmed, the market might feel increasingly confident about another interest rate cut in September. European indices were not buoyed by lower interest rates, as disappointing earnings reports from major companies showed consumers were reducing their spending, further signalling economic deceleration.​

Keep on Booming

US equity markets faced challenges, though for different reasons than Europe. Investors appeared to be growing concerned about excessive speculation in AI technologies, resulting in major tech companies declining on Wednesday. This came despite relatively promising economic news, as the latest report indicated US GDP increased at an annualised rate of 2.8% during the second quarter. This growth doubling from the initial three months in 2024 surpassed the projected increase of 2%.

While the data also revealed inflationary pressures had eased somewhat, with the price index falling to 2.3% from 3.1% in the first quarter, prices still exceeded the target level. With stronger overall economic expansion, the Federal Reserve now has more time to work on guiding inflation back down to the desired range. As a result, though the report signalled healthy economic conditions, stocks saw only modest changes afterwards. This reflected the potential for continued restrictive monetary policy weighing on the market recovery. Current forecasts still place the likelihood of an interest rate cut in September at 100%, but the pace of subsequent easing may slow.

A slower rate adjustment by the Fed contrasts with a potentially faster trajectory by the ECB should European economies weaken further. This divergence could widen the gap between interest rates in the two regions, negatively impacting the euro versus the greenback. Barring surprising positive data from the Eurozone next week, downward pressure on the EURUSD currency pair may persist.​

EURUSD Retests Triangle

The EURUSD pair has formed a triangle pattern over the medium term, with the recent breakout above $1.086 potentially signalling the start of further gains due to a retest. Should $1.0665 continue to provide support during any near-term retracement, the upward trend may extend to a measured-move target of $1.1688 if resistance at $1.1270, $1.13 and $1.14 give in. Conversely, a break below the regional floor could allow the market to fall back to $1.047 initially, with $1.025 next in sight.

Source: SpreadEX / EURUSD

Key Takeaways

The gap in monetary policies between the ECB and Fed may push European rates lower relative to the US, placing downward pressure on the euro.​ While inflation pressures eased slightly in both regions, the latest data showed continued weakening manufacturing activity in the Eurozone. This supports the case for additional interest rate cuts by the ECB, contrasting with a slower adjustment likely from the Fed due to ongoing US growth and inflation above target.