The Euro has appreciated against the US Dollar despite the revelation that the Euro-zone economy has slipped into a technical recession after a larger than anticipated downward revision of Q1 GDP growth, according to MUFG. The Euro-zone economy has contracted by -0.1% for two consecutive quarters in Q4 2022 and Q1 2023. Germany and Ireland largely contributed to the downward revisions, which offset an upward revision for Italy.
The report pointed out that lower consumer and government spending were the primary detractors from Q1 growth. Household consumption dipped by 0.3%, following a -1.0% decrease in Q4, while government spending declined sharply by 1.6% as Covid expenditures in Germany ceased. Inventories also negatively impacted growth, reducing it by -0.4 percentage points.
Despite weaker than anticipated domestic demand, MUFG expects the European Central Bank (ECB) to maintain its plan to deliver two more 25bps rate hikes in June and July, bringing the deposit rate to a peak of 3.75%. The Euro-zone rate market, which currently prices in about 25bps of hikes for next week's policy meeting and 43bps of hikes by the July policy meeting, shares this view.
MUFG suggests that the recent slew of weaker activity and inflation data from the Euro-zone could encourage the ECB to reduce its GDP and inflation forecasts for this year at next week's policy meeting. As a result, EUR/USD has moved back towards the middle of this year's trading range, between 1.0500 and 1.1000, as the pair continues to struggle for direction.