The Eurozone’s stronger-than-expected economic growth in the second quarter of 2024 has bolstered the case for the European Central Bank (ECB) to raise interest rates again at its September meeting, according to analysts at Brown Brothers Harriman (BBH).
GDP Data Strengthens Hawkish ECB Stance
Eurostat reported on July 30 that the Eurozone economy expanded by 0.3% quarter-on-quarter in the April-to-June period, surpassing the 0.2% forecast by economists. The data provided a welcome reprieve after the bloc narrowly avoided a recession in the second half of 2023, with growth of 0.0% and 0.1% in the third and fourth quarters, respectively.
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For BBH, the resilience of the Eurozone economy is a key factor supporting further monetary tightening. In a note to clients, the financial group argued that the GDP print reduces the immediate risk of a hard landing, giving the ECB the data-dependent justification needed to proceed with a rate increase. The ECB raised its key deposit rate to 3.75% in July, its ninth consecutive hike, as it continues to battle inflation that remains above the 2% target.
Market Implications for EUR/USD and Bonds
The reliable GDP data has immediate implications for currency and bond markets. A more hawkish ECB, relative to the Federal Reserve, which is widely expected to pause its own tightening cycle, could provide support for the euro. BBH noted that the interest rate differential between the U.S. and the Eurozone is narrowing, which may bolster the EUR/USD exchange rate in the near term.
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However, the analysts cautioned that the euro’s upside might be limited by ongoing concerns about the health of the German economy, the bloc’s largest. German industrial orders and factory output have been weak, and any further deterioration could offset the positive sentiment from the broader GDP figure. Investors are now closely watching the Eurozone Consumer Price Index (CPI) data for July, due for release on August 18, as the next major input for ECB policy expectations. A sticky inflation reading would significantly increase the probability of a September hike.
What to Watch Next
The ECB’s September 14 policy meeting is now the central focus for forex and fixed-income traders. Money markets are currently pricing in roughly a 40% chance of a 25-basis-point hike, a figure that could shift sharply based on upcoming data. Key indicators beyond the July CPI include the ECB’s quarterly bank lending survey and the August Purchasing Managers’ Index (PMI) readings, which will offer clues on whether the economy is maintaining its momentum or starting to buckle under the weight of higher rates.
The central bank’s own forward guidance remains data-dependent, with President Christine Lagarde repeatedly stating that future decisions will be based on the evolving outlook for inflation and the economy. The strong GDP print provides the ECB with more room to maneuver, but it does not guarantee a hike. A sharp downturn in activity or a significant drop in inflation in the coming weeks could still persuade the Governing Council to hold steady.
