Economic Data and Fed's Decision to Shake Up the EUR/USD

The week's economic calendar is packed with important data points that will provide insights into the health of the Eurozone and the United States economies. Key indicators such as GDP figures, inflation data, and employment reports will be scrutinised for clues about the future trajectory of monetary policy.

In addition to the economic data, the Federal Reserve's interest rate decision will be a focal point for market participants. Any unexpected moves or changes in forward guidance by the Fed are likely to have a profound impact on the dollar's value and, consequently, the EUR/USD exchange rate.

EUR/USD Daily Chart - Source: ActivTrader

European GDP Growth Rate - Tuesday 30th of July

In the first quarter of 2024, the Eurozone and the European Union as a whole saw a small improvement in the economy, with GDP growing by 0.3% over the previous quarter. This encouraging improvement comes after the EU performed flat and the Euro Area had a little drop in the last quarter of 2023.

This stronger economic picture is reflected in the European Union's Spring Forecast, which has revised upward GDP growth predictions for 2024 when compared to the Winter Forecast. The EU is predicted to increase by 1.0% overall, compared to a 0.8% growth rate for the Eurozone.

The EU's and the euro area's preliminary flash estimate of GDP for the second quarter of 2024 will be released at 9:00 AM GMT, with expectations of an increase at 0.7%.

European Inflation Rate - Wednesday 31st of July

Eurozone inflation continued its downward trend in June, easing to 2.5% from 2.6% in May. While this marks progress in the fight against inflation, core inflation, which excludes volatile energy and food prices, held steady at 2.9%.

A breakdown of inflation components reveals that services remained the primary driver, contributing 4.1% to overall inflation. Food, alcohol, and tobacco prices moderated slightly, while non-energy industrial goods and energy prices remained subdued.

Following an initial 25 basis point rate cut in June, the European Central Bank's (ECB) kept rates steady in July. However, market expectations for a further rate reduction in September remain strong, with a probability of around 80%. 

In recent comments, ECB Vice President Luis de Guindos opened the door to a potential interest rate decrease in September. He underscored the significance of the ECB's updated economic projections that will be available by then, stating they will be instrumental in determining whether inflation is on track to return to the target level.

Flash estimate inflation euro area for the month of July 2024 will be published at 09:00 AM GMT, with expectations of a slight decrease of the inflation at 2.4%. 

Fed Interest Rate Decision - Wednesday 31st of July

The Federal Reserve (Fed) aggressively raised interest rates eleven times throughout 2022 and early 2023, culminating in a target range of 5.25% to 5.50% in July 2023 to combat soaring inflation. Since then, rates have remained unchanged.

The Fed signalled a potential shift towards lower interest rates at its June meeting, though it maintained a cautious stance on inflation. Friday's data showed the personal consumption expenditures (PCE) price index, the Fed's preferred inflation measure, rose 0.1% monthly and 2.5% annually, in line with expectations. While this marks a slight cooling from May's figures, inflation remains above the Fed's 2% target.

The next Fed meeting is scheduled for July 30-31, 2024. Most economists anticipate the Fed to keep rates steady as they await further signs of inflation cooling. 

However, some analysts remain cautious about the consequences of high interest rates for longer, citing concerns about financial instability, rising mortgage costs, and global economic uncertainties. Others believe that some additional rate hikes might be needed.

Recently, former New York Fed President Bill Dudley has reversed his stance on US monetary policy. 

Once a staunch advocate of maintaining high interest rates for an extended period, he now urges immediate rate cuts to preempt a potential recession. Dudley argues that delaying action until September unnecessarily increases economic risks. The moderated inflation reading of last Friday has also increased speculation about a possible interest rate cut in September.

NFP Report - Friday 2nd of August

The latest employment data indicates a continued cooling of the labour market in June. Job growth of 206,000 was above the expected 190,000 but offset by downward revisions of 111,000 to prior months. 

The unemployment rate edged up to 4.1% from a recent low of 3.4%. While wage growth moderated to 3.9% year-over-year from 4.1% in May, aligning with expectations, it remains well above the pre-pandemic range of 2.5% to 3.0%. 

Economists are wondering whether these trends signify a return to normalcy post-pandemic or potential early warning signs of a broader economic slowdown, which are important factors to take into consideration by FOMC members. 

For the month of July, the NFP report published at 12:30 PM GMT is expected to show slower job creation figures of about 177,000, with the unemployment rate unchanged at 4.1%.

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