EUR/USD slumps to two-month low as Germany slips into recession

Philip McHugh May 26th 2023 - 2 minute read

The euro stumbled on Thursday after Germany’s latest GDP figures reported the country slipped into a recession at the start of the year.

Meanwhile, the pound opens today’s session on positive footing, with GBP/EUR buoyed at €1.1502 and GBP/USD ticking up to $1.2340. GBP/CAD is stable at CA$1.6816, while GBP/AUD and GBP/NZD hold steady at AU$1.8923 and NZ$2.0321, respectively.

Looking ahead, will a decline in the Federal Reserve’s preferred indicator of inflation lead the US dollar to weaken this afternoon?

What’s been happening?

The euro was pressured through yesterday’s trading session, following the publication of Germany’s latest GDP figures.

The finalised figures from Q1 saw quarter-on-quarter growth revised down from 0% to –0.3%.

With German growth having also contracted in the last quarter of 2022, the Eurozone’s largest economy was plunged into a technical recession. Leading the EUR/USD exchange rate to strike a new two-month low.

The downturn in EUR/USD was further exacerbated by US dollar strength. The ‘greenback’ continued to catch bids as US debt ceiling talks remained deadlocked

This upside in the US dollar was then reinforced by upbeat domestic data. As an upwards revision to Q1 GDP and drop in initial jobless claims, bolstered Federal Reserve interest rate expectations.

Meanwhile, the pound trended broadly higher on Thursday as it was underpinned by growing expectations the Bank of England (BoE) will need to continue to raise interest rates.

What’s coming up?

The pound is off to a positive start so far this morning, following the publication of the UK’s latest retail sales figures.

April’s figures reported sales growth rebounded from –1.2% to 0.5%, beating forecasts for a more modest recovery to 0.3%.

Likely acting as the main catalyst of movement in the US dollar today will be the latest core PCE price index. As the Fed’s preferred measure of inflation, could a decline in April weaken rate hike bets and curtail the US dollar’s recent bull run?

Also, of note to USD investors will be the latest US durable goods release, where an expected contraction last month may also weigh on USD sentiment.

Meanwhile, the absence of any EUR data of note could leave the euro at the mercy of markets. Could a pull back in the US dollar offe the single currency some relief?

Written by
Philip McHugh

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