EUR/USD Nudges Higher as Euro Area GDP Hits Estimates, Economic Sentiment Beats

Euro GDP and ZEW Sentiment Key Points:

• EU GDP Growth Rate QoQ: Actual 0.2% Vs 0.2% Forecast.
• EU GDP Growth Rate YoY: Actual 2.1% Vs 2.1% Forecast.
• EU ZEW Economic Sentiment Index: Actual -38.7 Vs -59.7 October.
• German ZEW Economic Sentiment Index: Actual -36.7 Vs -59.2 October.

The Euro Area economy expanded 0.2% quarter on quarter in the three months to September of 2022, following a 0.7% growth in Q2, in line with market expectations. It was the weakest GDP growth since the rebound from Covid-19 restrictions in Q2 2021 as a contraction in Q4 seems a certainty. The Inflation rate continues to hover at record levels with the energy prices elevated and further rate hikes expected from the ECB.

The ZEW Indicator of Economic Sentiment for Germany and the Euro Area rose sharply in November on hopes of a fall in inflation data. Germany saw an improvement of 22.5 points to -36.7, its highest reading since June and above market expectations of -50.0. The Euro Area improved to -38.7 in November of 2022 from – 59.7 in October which makes the ECBs job harder as they try to balance the inflation fight and market expectations of slower rate hikes moving forward.

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The Euro’s recent rally against the greenback may seem like a turning point when looking at recent data releases, however this may be a bit premature. The rally has had more to do with dollar weakness rather than a Euro recovery. This was echoed by the European Commission on Friday who warned that inflation is not going away anytime soon while slashing their growth forecast for 2023. The commission expects a continued contraction of the economy heading into Q1 2023 as the cost-of-living shock is expected to bite consumers particularly hard during the winter months.

The Commission expects inflation to remain elevated with estimates of 6.1% for 2023, an increase from July’s forecast. The Commission’s report prompted a response from ECB Vice President Luis de Guindos who echoed the gloomy outlook for the winter months.

Market reaction

EUR/USD 1H Chart

Source: TradingView, prepared by Zain Vawda

Initial reaction was relatively subdued with a 10-pip spike higher for EURUSD following its 70 pip rally to start the European session.

The recent rally on EUR/USD owes more to dollar weakness yet the size of the move has surprised many. Since breaking the bear flag formation on the D chart the pair has rallied a further 200 odd pips with immediate resistance to be found around the 1.0500 area.

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda