Eurozone economic data for Q2 showed unexpected resilience, with GDP growth coming in at 0.4% quarter-on-quarter, surpassing the median expectation of 0.2% [1]. Purchasing Managers' Index (PMI) data also surprised to the upside, indicating that the Eurozone economy has weathered recent headwinds, such as higher energy prices and supply disruptions linked to the (near) closure of the Strait of Hormuz, better than anticipated [1]. However, Rabobank's Jane Foley cautions that several factors—including the breakdown of the US–Iran agreement, expectations of further European Central Bank (ECB) tightening, increased competition from China, and a loosening German labour market—pose downside risks to growth and could limit Euro (EUR) strength, particularly through weaker consumer spending [1]. Germany’s adjusted unemployment rate rose to 6.4% in July from 6.3% in June, with the number of unemployed exceeding 3 million on an unadjusted basis [1]. This labour market loosening has led to a slowdown in real compensation growth, suggesting consumer spending may stagnate for the remainder of the year [1].
On the currency front, EUR/USD has traded in a narrow range around 1.1553, with the US Dollar Index (DXY) stabilizing above 99.50, reflecting investor uncertainty over the Federal Reserve's (Fed) next moves and ongoing Middle East tensions [2]. The US Nonfarm Payrolls (NFP) data for July came in weaker than expected, prompting traders to scale back expectations for a Fed rate hike at the September meeting, though markets still price in a 44% chance of a hike according to the CME FedWatch Tool [2]. Elevated oil prices, driven by uncertainty over the reopening of the Strait of Hormuz, are raising concerns that inflation could remain above the Fed’s target, complicating the policy outlook [2]. ING analysts note that with key July data released and August typically quiet for ECB communication, the ECB has given markets a 'quasi-commitment' to a September hike, limiting the scope for fresh policy surprises from the Eurozone side in the near term [2]. ING further argues that EUR/USD is currently dominated by US developments, and a softer US CPI print could push the pair above 1.160, with the next resistance at 1.1630 [2].
TD Securities economists expect US output growth to remain sideways this year, with GDP growth slightly below trend and unemployment near 4.3% by Q4 2026 [3]. They see core CPI inflation at 2.6% year-on-year in Q4 2026, with gradual disinflation only resuming in 2027 [3]. The lingering oil shock and Iran-related risks are expected to keep the Fed on hold through year-end, with a 25% probability assigned to a US recession over the next year [3]. The economists highlight that most of the impact of higher oil prices will filter into headline inflation, and supply chain stresses make substantial disinflation unlikely this year [3]. They also note that the outlook remains fluid amid ongoing geopolitical uncertainty and potential policy changes in the US [3].
Geopolitical tensions remain high, with US President Donald Trump stating that Washington is 'semi-negotiating' with Tehran while maintaining a low-key military campaign, though Iran denies direct talks and has tied the reopening of the Strait of Hormuz to US concessions [2].
CONCLUSION
While Eurozone growth data has surprised to the upside, persistent geopolitical risks, elevated oil prices, and labor market softening in Germany are weighing on the outlook for both the Euro and global markets. The Federal Reserve and ECB are expected to remain cautious, with inflation and policy uncertainty likely to dominate market sentiment in the near term. Investors are closely watching upcoming US CPI data and developments in the Middle East for further direction.