EUR/USD is currently positioned at approximately 1.1450, having reached about 1.1480 — the highest point since June 17 — following a second-quarter euro area GDP announcement that surpassed all previously published projections. The pair experienced a notable increase on Wednesday following the Federal Reserve’s decision to maintain interest rates at their current levels. This prompted traders to reverse the tightening that had been anticipated in the short end of the US yield curve prior to the announcement. Consequently, this shift disrupted the minor downtrend that had constrained rallies since mid-July. Thursday’s European data reinforced it. The immediate context is a six-week range that has remained unresolved. Since mid-June, the pair has encountered resistance around 1.1480, while bids have consistently appeared near 1.1364 and at the 38.2% Fibonacci retracement of the January 2025 to January 2026 advance at 1.1355. Sellers examined that support zone earlier this week and were unsuccessful, recording an intraday low at 1.1353 on Tuesday prior to the reversal. On Wednesday, the intraday high reached 1.1483. Both boundaries of the range have now been tested within a single week, representing a classic setup for a resolution, as well as a classic setup for a false break. The longer arc is significant for establishing context. The EUR/USD reached a high of 1.2016 on January 27, 2026, and has since experienced a decline over the past six months, approximately 5% lower from that peak. Throughout July, it has been trading below its 50-day, 100-day, and 200-day moving averages for the majority of the month. It has increased by approximately 0.5% to 0.9% over the past twelve months and around 1.3% over the last month. This is not a euro bull market interrupted. It is a downtrend that has stalled at support and is now assessing whether a true fundamental catalyst has emerged.
That inquiry encapsulates the entire projection. Wednesday’s rally represented a rates unwind rather than a repricing of relative growth. Thursday’s rally presents a notable divergence: the euro area recorded a quarterly growth of 0.4%, surpassing the consensus estimate of 0.2%, while the US reported an annualised growth of 1.5%, falling short of the 1.8% expectation. Concurrently, both German and Spanish inflation figures experienced an uptick during the same session. For the first time this year, the growth-and-inflation differential shifted in favour of the euro on both fronts simultaneously. Whether that withstands interaction with Friday’s eurozone flash CPI, month-end flows, and a Middle East escalation that continues to elevate energy prices is what the forthcoming 48 hours will determine. The technical structure provides a definitive response in either direction, remaining within 150 pips of the current level. The euro area expanded by 0.4% quarter on quarter in the second quarter, as indicated by Eurostat’s preliminary flash estimate released on Thursday at 09:00. Consensus stood at 0.2%.Some desks had reported figures as low as 0.1%, and the entire pre-release discourse had centred on the question of whether the bloc would manage to evade a technical recession altogether. It not only sidestepped a setback but also achieved its most robust quarter since the beginning of 2025. The EU as a whole experienced a growth rate of 0.5%. On an annual basis, seasonally adjusted GDP increased by 1.0% in the euro area and by 1.2% across the EU.
The disaggregation by country provides greater insight than the overall figures. Spain once again outperformed the major economies, achieving a growth rate of 0.7%. Germany, France, and Italy each recorded an expansion of 0.2%, with Germany and Italy surpassing the anticipated growth of 0.1%, while France showed a recovery from a lacklustre first quarter. The Netherlands experienced a growth rate of 0.4%. Ireland recorded the strongest quarterly reading in the bloc; however, Irish GDP is sufficiently distorted by multinational accounting practices that it warrants a degree of scepticism. The composite picture reveals a bloc expanding at distinctly varying rates, with the periphery surpassing the core by an increasingly significant margin. The context of the revision is significant and merits careful articulation. The first quarter had been reported as a 0.2% contraction in earlier vintages and is now being characterised as flat in the accompanying commentary, which suggests an upward revision landed alongside the flash estimate. Regardless, the inquiry into recession is settled for the time being, and this conclusion was reached through the same report that provided the European Central Bank with justification to continue its tightening measures. For the currency, the mechanism is straightforward. The primary limitation on the ECB’s inclination to tighten has been the fragility of growth — the Governing Council’s own forecast for 2026 indicates a growth rate close to 0.8%, and pursuing aggressive hikes in a nearly recessionary environment poses a risk of significant harm. That constraint has just loosened significantly. A bloc expanding at a rate of 0.4% on a quarterly basis, with an annual growth rate of 1.0%, can accommodate an additional 25 basis points without the discourse veering into imprudence. Markets reacted by elevating the euro to its highest position in six weeks, while also increasing September pricing.
The read from the sell side was immediate: much better than expected, and sufficient to maintain the tightening bias, with focus now turning to the potential for inflation to generate second-round effects. The second leg of Thursday’s euro bid was driven by national inflation flashes, both of which exceeded expectations on the upside. German preliminary July CPI recorded a year-on-year increase of 2.8%, surpassing the consensus estimate of 2.7% and reflecting a notable rise from June’s figure of 2.3%. Core inflation, excluding food and energy, is anticipated to be 2.4%. Energy prices increased by 8.3% year on year — this succinct figure encapsulates the entire acceleration and directly links European inflation to developments in the Middle East. Spain exhibited poorer performance. Preliminary July consumer prices increased by 3.5% year on year, a rise from 3.2% in June, marking the highest level since May 2024. Core inflation, excluding energy and unprocessed food, increased to 3.0%. Regional German data preceding the national release had indicated a notable acceleration in price growth across Bavaria, North Rhine-Westphalia, Saxony, and Hesse. One macroeconomic analysis suggested that German headline inflation could rebound to approximately 2.7% based on these observations. The actual print exceeded even that figure. This reverses a disinflation trend that had been the dominant European narrative through June.
Euro area annual inflation was confirmed at 2.8% in June, a decrease from 3.2% in May, marking the lowest rate since February, prior to the disruption of energy supply caused by the Iran conflict. Energy inflation decelerated significantly to 8.5% from 10.8%, while services experienced a reduction to 3.2% from 3.5%. Additionally, the core rate decreased to 2.4% from 2.6%. That improvement is now unwinding, and it is unwinding through exactly the channel the ECB flagged when it held on July 23 and warned that higher energy costs may still feed into broader prices. For EUR/USD, the implication is counterintuitive but significant: rising European inflation driven by energy is euro-positive in the current regime, as it compels the ECB toward a hike that the market has not fully priced in. That represents the inverse of the dynamic undermining gold and contrasts with the typical transmission of energy shocks to the single currency. The euro area, as an energy importer, faces a terms-of-trade shock that could weaken its position. The rate channel is currently leading the trade channel and will continue to do so until the ECB indicates otherwise. Staff projections now estimate average inflation for 2026 at 3.0%, up from 2.6% in June, while 2027 is revised to 2.3%.