- Euro-zone headline inflation is set to drop to 0.7% yearly.
- The old continent's growth rate is set to slow to only 0.1% quarterly.
- EUR/USD will likely remain under pressure, regardless of USD weakness.
The bar cannot be lower – 0.1% quarterly growth is what economists expect for the euro-zone in the third quarter. However, the actual figure may fail to overcome this low bar, leading to pressure on the euro.
Weak growth now and later, and EUR/USD reactions
The euro-zone economy expanded by only 0.2% in the second quarter and only half that rate is on the cards now. While France's preliminary figure beat expectations with an increase of 0.3% against 0.2% expected, its annual expansion met expectations. On a yearly basis, the 19-country-currency bloc is likely to decelerate from 1.2% to 1.1%.
This initial report comes out after several countries have published their figures, but Germany will do so only later on. The "locomotive" of the old continent contracted in the second quarter and has likely entered a recession in the third one. Politicians in Berlin have already begun denying a "deep recession" – alluding to the high chances that the economy has entered a downturn.
The euro area's potential slowdown is accompanied by a modest deceleration in the US – 1.9% annualized and by drops in China and other countries. However, the euro-zone is struggling more than most of its peers.
For EUR/USD, even if the preliminary publication shows a rise of 0.2% in GDP, investors will likely shrug it off as they await Germany's numbers. Only an expansion of 0.3% – highly unlikely – may push the common currency higher, even if inflation figures miss expectations.
A flat growth rate would be a disappointment and may have a minor adverse effect on the common currency. An outright contraction would already trigger gloomy headlines, sending EUR/USD plunging and overshadowing other figures.
Inflation set to tick down
Consumer Price Index is set to drop from 0.8% to 0.7% in October – less than half the European Central Bank's target of 2%. Falling energy prices are a significant part of the story.
Subdued inflation has underpinned ECB President Mario Draghi's decision to introduce more stimulus. While another weak number is unlikely to shock anyone, it will help shape expectations for incoming President Christine Lagarde's first days in office.
Economists expect Core CPI – which the central bank has been eyeing more and more – to remain unchanged at 1%. Any drop in underlying inflation may weigh on the euro. An acceleration to 1.1% or beyond, may push the common currency higher.
EUR/USD priorities and reactions
As mentioned earlier, EUR/USD traders are set to give GDP precedence over CPI. A shock growth figure – either to the upside or the downside – nay overshadow any surprise in inflation. Slow price development is almost a permanent feature, while fears of a recession are relatively new.
If both releases go in the same direction, the impact is set to be more significant than if only one surprises and the other meets expectations. And if the numbers offset each other, EUR/USD may trade choppily but without trending in any direction.
The double-feature release of growth and inflation figures are set to trigger EUR/USD action – with the downside looking more appealing. Investors eye signs of an imminent downturn more than they fear weak CPI.
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