Eurozone economy remains resilient
The Eurozone economy showcases resilience, bolstered by unexpected growth despite geopolitical and energy pressures, positioning the European Central Bank (ECB) for potential interest rate hikes. Per the full note from ing-think, GDP expanded by 0.4% in Q2 2026, surpassing many expectations, while inflation is projected to remain above 3% until Spring 2027. As the ECB considers a September tightening, the potential for further rate increases looms, emphasizing the evolving dynamics that could influence the euro. Our coverage highlights a consensus stance towards the euro appreciating against the dollar, as traders price in these monetary policy shifts.
What the desk is arguing
The Eurozone economy remains robust, with the recent Q2 GDP growth suggesting a favorable outlook for the euro. The desk frames this as a significant confidence booster for the ECB, anticipating a September rate hike as inflation persists.
Supportive factors include a firm 0.4% growth rate alongside improving employment expectations, which suggest momentum could strengthen further. This growth is crucial as Germany emerges as a growth leader for the region after previous stagnation, contrasting the stagnant performance of France.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis aligns with jpmorgan's bullish sentiment around euro rates, indicating a possible appreciation trajectory for the euro against the dollar as monetary tightening is anticipated.
How other firms see it
Firm alignments show that participants such as jpmorgan and others anticipate euro gains in light of potential ECB rate hikes. Conversely, bofa holds a more cautious, bearish view on the euro at 1.04 based on prevailing economic uncertainties.
Connected dynamics include the euro’s performance against the USD and reactions to ECB policies, helping traders gauge the currency's direction amid evolving economic conditions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Q2 Eurozone GDP growth of 0.4% reinforces resilience amidst energy shocks.
- 02Inflation is projected to stay above 3% until Spring 2027, prompting potential ECB rate hikes.
- 03Germany's growth recovery contrasts with stagnation in France, complicating budget negotiations.
- 04Improving employment expectations support continued economic momentum.
Market implications
Watch for EUR/USD movements near 1.075 as market participants adjust to forecasted ECB tightening in September. Positioning signals around this level could further enhance euro trading.
Risks to this view
A reversal could occur if inflation pressures lead to a weaker-than-expected response from the ECB or if geopolitical developments exacerbate economic instability, particularly affecting French bond markets.
Articles Eurozone economy remains resilient Published 11:39 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The eurozone economy has weathered the energy shock better than anticipated, and moderate growth is likely to continue. With inflation now expected to remain above 3% until spring 2027, the European Central Bank is likely to raise rates in September, while an additional increase cannot be ruled out Peter Vanden Houte A European Central Bank rate hike in September is likely A surprisingly strong second quarter (though not everywhere) Despite persistent uncertainty and the energy shock triggered by the war in the Middle East, eurozone GDP grew by a stronger-than-expected 0.4% in the second quarter. Excluding Ireland’s volatile contribution, the eurozone has now expanded for four consecutive quarters at a pace of around 0.3% quarter-on-quarter.
Germany, which had barely grown for three successive years, was among the eurozone’s main growth drivers in the first half of 2026. Higher defence and infrastructure spending now appears to be gaining traction, which should support growth over the coming year. France, by contrast, recorded no growth at all in the first half of 2026.
This does not bode well for the budget negotiations. With presidential elections due in 2027, putting together the necessary austerity package will be difficult, particularly against an unsupportive growth backdrop. In that context, renewed upward pressure on French bond spreads has become a material risk for the second half of the year.
Underlying growth momentum remains positive Judging by sentiment indicators, the third quarter began on a firm footing, with both the PMI and the European Commission’s sentiment indicator rising in July and August. Encouragingly, the employment expectations index also improved for a second consecutive month, a development reflected in lower unemployment expectations among European households. This should support consumption in the second half of the year.
Admittedly, the exceptionally warm summer weather may have shaved some growth off the third quarter: in Germany, for example, low water levels on the Rhine disrupted supply chains. Nevertheless, barring a renewed escalation of the conflict in the Middle East, the underlying growth trend remains positive. Following the upward revision to first-quarter GDP and the stronger-than-expected second-quarter outcome, we have raised our 2026 growth forecast to 0.8%.
For next year, we expect growth of 1.3%. Business sentiment recovered Source: LSEG Datastream "> Source: LSEG Datastream Inflation to remain above 3% until spring 2027 The renewed rise in energy prices pushed headline inflation to 3.3% in August. Energy is likely to keep inflation above 3% for the remainder of the year and going into 2027, especially as the replenishment of gas inventories in Europe has driven natural gas prices significantly higher over the past month.
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