Eurozone recorded the worst drop of GDP in history in 2Q. But markets are driven by expectations about future growth and outlook for economic momentum of the EU is definitely better than of virus-stricken US.

Eurozone GDP contracted by 12.1% QoQ in 2Q. The EU has never felt so badly economically. And although activity has been gradually recovering, we saw little to no evidence of V-rebound story.

The depth of contraction did not differ much between key economies such as Germany, France and Italy. Their output losses were between 10-14%. The dynamics of Spain turned out to be an alarming outlier where GDP contraction was more than 18%. Since some of the restrictive measures had to be restored in Spain, expectations are growing that it will lag behind other major economies in the bloc. In terms of other countries in the bloc, the overall decline was less than expected, which justifies the recent strengthening of the euro against USD.

At the same time, there are more and more signs of a positive third quarter. Consumer inflation unexpectedly accelerated to 0.4% in July, while in June and May it was 0.3% and 0.1% respectively:

Excluding fuel and food, prices increased by as much as 1.3%. A big plus for the positive market sentiment was the rise in prices for industrial goods (+ 1.7%), i.e. this is a signal that the export situation is improving. Nevertheless, service price inflation slowed down from 1.2% to 0.9%, which indicates a gradual fading of the consumer impulse from the fiscal stimulus.

One of the important factors of inflation in the EU, which in August will make a negative contribution, is the postponement of sales season. For example, inflation accelerated the most in Belgium, Italy and France (from 0.2% to 1.7%, from -0.4 to 0.9%, and from 0.2% to 0.9%, respectively) where the sales season was postponed to August. Given the easing of inflation in services, the sell-off will contain inflation next month.

The latest economic data show that risks for the EU are clearly biased towards acceleration of growth, but positive outlook can easily be thwarted by a new wave of coronavirus (as the example of the US shows). While there are no clear signs of an acceleration in the incidence rate, EURUSD has little incentive to think about a reversal.

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