The Euro continues to trade just above the 2007 highs near 1.4865 – 1.4900, as price consolidates following the massive declines seen over the past week.
Indeed, the markets are now pricing in over 25bps worth of rate cuts by the European Central Bank over the next 12 months thanks to ECB President Trichet’s more dovish tone last Thursday. However, Thursday’s release of Euro-zone GDP and CPI could have a huge impact on these rate expectations, though the former is more important at this juncture. Why? Everyone is already well-aware that inflation is a problem in the Euro-zone, but Mr. Trichet turned the spotlight on the weakening economy last week. Now, if these GDP numbers confirm that a slowdown is plaguing the region (GDP is anticipated to contract 0.2 percent in Q2 and slow to a 1.5 percent annualized pace), the markets will be quick to price in more aggressive rate cuts within the next year, which would be quite bearish for the Euro. On the other hand, if the quarterly rate of growth manages to hold positive and CPI rises in line with expectations to 4.1 percent, EUR/USD could rebound above 1.50.
