Contrasting US/EU Data and Eurodollar

With US Q2 GDP expected to confirm growth while inflation falls, Europe is seen to have hot inflation despite near-stagnation. The policy deviation could keep pushing the euro lower.

A Trove of US Data

Wednesday sees one of the main economic data points for the week with the second look at US Q2 GDP figures. The expectation is that the US GDP increased rate of 2.4% for the second quarter will be confirmed, with attention focusing on some of the components being released. The 2.4% growth in GDP will need to be parsed with the expected -5.9% drop in corporate profits in the same period. Part of that could be explained by PCE prices roaring ahead at 4.1%, which could be part of the data that Fed Chair Jerome Powell said is important while mentioning that the Fed will be "cautious" about future policy.

One of the things investors will be looking at is how US growth at a potentially inflationary rate pairs with the Fed expecting one more rate hike and a growing majority of traders now expecting at least 25bps added to rates this year. If a 2.4% GDP is seen as inflationary, what then of the 5.9%, which is the current estimate from the Fed's GDPNow tracker for the third quarter? However, investors expect that number to be adjusted lower as the rest of the data from the quarter comes out and closer to the 1.8% consensus among economists' forecasts.

A Key Preview for the ECB

For the euro, ECB President Christine Lagarde stuck to the rhetoric of keeping rates "high as long as needed to defeat inflation" at the Jackson Hole. Inflation has been coming down, but that's been thanks to more volatile elements, such as falling energy prices. However, the recent move higher in crude has seen costs return. The increasing cost of shelter is a major concern pushing core prices higher, despite the rising interest rates. Germany, the largest economy in Europe, is particularly affected by higher rent prices, contributing to having among the highest inflation rates in the EuroZone. The German government has proposed rent controls to deal with the situation.

While the US deals with the problem of inflationary economic growth, Europe has to deal with high inflation without growth. The Fed can hike rates to curtail inflation, slow the economy, and boost the relative value of the dollar. But the ECB can't raise rates without a high risk of the economy tipping over into a recession (which it might do on its own, anyway), so raising rates doesn't necessarily imply that the euro could see benefits in the long run.

Wedge Pattern Complications

Despite the weighing landscape, EURUSD’s short-term price action will likely be impacted by the relative outcome of both US and EU data, with technicals pointing to a potential wedge completion at $1.0766.

If the pattern gets validated, the typical pullbacks tend to be deep, with both picks at $1.0903 and $1.1065 coming into focus. Both levels, however, are more of a short-to-medium-term play. Bulls will have to reclaim $1.0766 for a chance there.

Conversely, and data-dependent, losing $1.0766 will open up the support of $1.0633, increasing speculation for further drops towards the $1.06 round support. Bears must gain control of the $1.07 handle before witnessing any lower attempts.

Source: SpreadEx / EURUSD

Key Takeaways

The US Q2 GDP is expected to confirm a growth rate of 2.4%, despite a projected -5.9% drop in corporate profits for the same period, with PCE potentially influencing future policy decisions. Investors are concerned about how the potential inflationary US growth will align with the Fed's plan. In Europe, high inflation rates persist despite near-stagnation in economic growth as the ECB faces challenges due to rising costs, particularly shelter expenses. While the US can address inflation with rate hikes, the ECB must be cautious to prevent a recession and uncertainty about the long-term benefits for the euro remains.