EU GDP is set to slowdown after US economy headed into recession

Bulls take a breather ahead of the EU preliminary inflation report as EUR/USD clings to daily gains above 1.0200 despite weak German GDP data. The dollar remains heavy as yields fall amid renewed economic woes. As we begin with Europe, Q2 GDP and preliminary monthly CPI from the EU are due on Friday, likely to show a weak second quarter. Q2 GDP in the European Union is expected to slow to 0.2% from 0.6% in Q1. It is unlikely that inflation will peak at 8.6% anytime soon. Yesterday's numbers from Germany showed an increase of 8.5% in flash CPI for July.

Following Thursday's disappointing US GDP report, the Fed is expected to raise interest rates less aggressively than previously estimated. A further decline in US Treasury bond yields was caused by the market reaction, which further weakened the dollar.

Meanwhile, macro data are raising concerns about an economic downturn also in Europe, which may prompt major central banks to ease their policy tightening cycle. This, in turn, further undermines the safe-haven greenback by boosting global risk sentiment.

In some parts of the eurozone, inflation is as high as 20%, so whether the bank's headline rate is -0.5% or zero is irrelevant. Having seen June CPI confirmed at 8.6% only last week, the persistently high readings we've been seeing in respect of PPI, which is at over 30% in several parts of the EU, means we probably haven't seen the peak yet. We expect this to move closer to 9% later this morning.

With rates raised last week for the first time since 2011, this presents an enormous challenge for the European Central Bank. Despite the 50bps rate increase, inflationary pressures across the region are unlikely to change significantly. As a result of reduced gas flows through Nord Stream 1, European gas prices have already risen sharply this week.

Events of today

Participants now await the release of the US Personal Consumption Expenditures (PCE) report - the Fed's preferred inflation gauge - during the early North American session. Per the market consensus, the US PCE may elevate to 6.7% from the prior release of 6.3%. USD demand may be influenced by the data and impact major currency pairs. Participants in the eurozone market await the release of Gross Domestic Product (GDP) data. As expected, economic growth is seen to slow to only 3.4% annually, down from 5.4% earlier in the year.