The Euro is approaching a pivotal moment as it confronts significant challenges emanating from Germany and France, while market expectations for a European Central Bank interest rate hike have climbed to approximately 90%.
Key Fundamental Drivers
The European Central Bank is widely anticipated to keep interest rates unchanged at its upcoming monetary policy meeting. Following its latest hike in June, the ECB is currently inclined to observe the impact of prior policy tightening on the economy and inflation before determining its next steps. Analysts note that economic data released since the June meeting has not substantially altered the ECB's policy outlook. The eurozone economy remains positioned between a relatively moderate growth scenario and the ECB's previously established baseline, with limited recovery momentum and no clear trend in inflation yet established. The data is insufficient to prompt an immediate shift in the ECB's stance, making a steady hold on rates the prevailing market expectation.
Concurrently, recent public remarks from the ECB President and several Governing Council members have maintained an overall cautious tone, aligning with market expectations. Policymakers broadly emphasize that future monetary policy will remain dependent on economic data, without pre-committing to a specific path. This indicates the ECB's desire to retain sufficient policy flexibility to respond to potential new developments.
A critical variable influencing the ECB's judgment remains energy prices. Persistent tensions in the Middle East have driven a notable increase in international crude oil prices, raising concerns about the stability of future energy supplies. Energy price volatility not only risks re-igniting inflation but also adds uncertainty to future price trends. The intensified fluctuations in oil prices present greater uncertainty for the ECB as it assesses the inflation outlook, contributing to its preference for a wait-and-see approach. If energy prices continue to rise, the pace of disinflation in the eurozone could slow, potentially forcing the ECB to maintain its current higher interest rates for longer. Conversely, if energy prices retreat and economic growth remains persistently weak, the future policy focus may gradually shift towards supporting economic recovery.
Market participants believe that the energy price factor alone is sufficient reason for the ECB to avoid sending overly clear policy signals in its statement and press conference. Rather than hinting directly at future hikes or cuts, the ECB is more likely to continue emphasizing its data-dependent approach, adjusting policy gradually based on forthcoming inflation, employment, and growth figures.
US Retail Sales Show Resilience
US retail sales data for June continued a pattern of modest expansion, with consumer resilience once again surpassing pessimistic market expectations for the economic outlook. Data released by the US Census Bureau showed retail sales rose 0.2% month-over-month, matching expectations, with the May figure revised upward to a 1% increase. A sharp decline in gasoline station sales was the primary drag for the month, but excluding gasoline, retail sales grew 0.7%, indicating underlying consumer spending strength remains robust.
The so-called control group sales, which feed directly into GDP calculations, rose 0.5%, in line with forecasts, providing positive support for assessments of second-quarter consumption contributions. Against a backdrop of persistently low consumer confidence surveys, the resilience of actual spending data again highlights the divergence between survey sentiment and real behavior.
The largest drag in June came from gasoline stations. With the national average pump price falling by about 50 cents per gallon, gasoline station sales plunged 5.3% for the month, the largest monthly drop since December 2022. Excluding autos and gasoline, retail sales increased 0.4%, matching expectations. Core retail sales, excluding autos, dipped slightly by 0.2%, but analysts noted the decline in gasoline consumption was the main reason for the core data's softness, with other categories generally holding steady. Seven out of thirteen retail categories recorded growth. Nonstore retailer sales jumped 1.9%, with the Amazon Prime Day promotional event cited as a key driver. Sales at sporting goods, hobby, electronics, and appliance stores also rose. Spending at restaurants and bars saw a small increase, while health and personal care and food and beverage sales edged lower.
The control group sales figure, which excludes autos, gasoline, building materials, and food services, rose 0.5% as expected. This metric is viewed by the market as a core reference for measuring consumption's actual contribution to economic growth, and its steady performance helps solidify expectations for the consumption component of Q2 GDP. Meanwhile, roughly CPI-adjusted real retail sales have continued to recover from negative readings last December, reaching their highest level since March 2022 in June, reflecting an improvement in consumers' real purchasing power as inflationary pressures ease marginally.
European Economic Pressures Mount
The European economy faced multiple pressures on Thursday, with the overall outlook darkening due to factors ranging from declining German industrial output and French fiscal austerity to energy-driven inflation risks.
Germany's chemical industry is contracting again. The German Chemical Industry Association forecasts a 1.5% decline in total industry production for 2026, marking a second consecutive year of contraction. Production fell 3% in the first half, with sales dropping 1% to 106 billion euros, and producer prices rising only 2%. The VCI president stated the performance was "disappointing," noting European demand is stagnating or even declining, while rising local production capacity in Asia is replacing imports from Germany. Although Middle East conflicts have temporarily benefited some European producers—as Asian competitors rely more on raw materials—this is far from offsetting overall weak demand and investment. This contrasts with the optimistic sentiment from individual firms like Evonik and Brenntag, which raised profit forecasts. As Germany's third-largest industrial sector and a bellwether for manufacturing, the chemical industry's persistent decline signals broader industrial troubles.
France has unveiled severe fiscal austerity measures. The government announced spending caps for 2027, planning to significantly limit growth in most public expenditures. Apart from a 6.4 billion euro increase in defense spending as per the military programming law, the overall budget for ministries will rise by only 1.5 billion euros, with most departments' spending growth capped below the inflation rate. The government is striving to restore public finances under the pressure of a high budget deficit projected at 5.1% of GDP and debt at 115.9% of economic output in 2025. The Budget Minister warned that "doing nothing would lead to an uncontrolled deficit by 2027." Debt interest costs are expected to rise from 64.8 billion euros in 2026 to 74.2 billion in 2027, with social security spending remaining the largest pressure point, set to increase by 17 billion euros to 838.3 billion. The government intends to ask local authorities to contribute to the austerity effort, setting the stage for parliamentary budget battles in October.
Bond Markets and Central Bank Expectations
The yield on the German 10-year government bond rose to 3.135%, its highest since May 20, gaining 10 basis points for the week and 28 bps for the month, as investors worry that rising energy prices will push inflation higher and force the ECB to hike more aggressively. The spread between German and US 10-year yields narrowed to 143 bps, near a one-month low. Market pricing indicates about a 90% probability of an ECB rate hike in September, with the possibility of a third hike before year-end also present. A Reuters poll showed 70% of economists expect one more rate hike this year, likely in September, while nearly 30% believe rates will remain unchanged. Economists have lowered their 2026 inflation forecast by about 40 basis points—prior to the escalation in the Middle East—but expect inflation to only return to the 2% target by the second quarter of 2027. The eurozone economy contracted 0.2% in the first quarter and is expected to grow 0.2% in the second, but the full-year 2026 growth forecast has been cut to just 0.5%, marking the fourth consecutive downward revision. The chief European economist at HSBC warned that higher energy inflation increases the risk of businesses passing on wage costs through price hikes, suggesting that if oil remains above $90 in September, another ECB rate hike could be a wise move.
Market Performance and Strategy
European stocks edged higher for a third consecutive session on Thursday, with the pan-European Stoxx 600 index rising 0.16% to 643.73 points. However, markets remained range-bound overall due to escalating Middle East conflicts. Investors had hoped the earnings season would shift focus away from geopolitics and act as a new catalyst, but this expectation has yet to materialize, with the index up only 0.41% for the week.
Sector performance was mixed. Basic resources led declines, falling 1.38%, while media stocks were the top performers, gaining 1.43%. The technology sector was flat overall; although TSMC reported a record 77% profit jump for Q2, it failed to lift related stocks. ASML rose 3.16% on strong results, while STMicroelectronics and BE Semiconductor fell 4.91% and 3.20% respectively, indicating signs of cooling in the sector this month.
Among individual movers, Delivery Hero shares were flat after Uber announced a public takeover offer valued at approximately $14.8 billion; Delivery Hero's stock is up nearly 70% year-to-date. ABB fell 5.91% after announcing a $5.5 billion acquisition of automation company Rotork, whose shares surged 66.78%. Sweden's Indutrade jumped 17.08% on better-than-expected quarterly results. Norway's Telenor plunged 11.64% after missing profit expectations and cutting its full-year outlook. France's Publicis Groupe gained 3.07%, buoyed by AI-driven demand for marketing services.
From a strategy perspective, a senior equity strategist at Generali Investments expressed a neutral stance on the US and Europe with a slight overweight on Europe, anticipating that conflicts may ease again and European growth momentum will recover. Geopolitical risks are also prompting investors to increase bets on at least one more 25-basis-point ECB rate hike before year-end. Overall, European markets are seeking balance between positive earnings and geopolitical concerns, with subsequent moves likely dependent on developments in the Middle East.
Technical Analysis for the Euro
On a 4-hour chart, the Euro's price action is consolidating within a recent high range. Technical indicators suggest a typical rebound correction pattern is in play, with bullish momentum currently holding an advantage. The price is trading near the top of the Bollinger Band, with the 4-hour RSI holding above the 50 mid-level and the MACD indicator showing moderate bullish momentum above the zero line. However, the Bollinger Bands remain relatively flat, and caution is warranted. If the MACD fails to generate a new strong bullish impulse and instead turns negative with a "second" bearish expansion, accompanied by the RSI falling below 50, it would signal that selling pressure may re-emerge following this corrective phase.
Key resistance is seen around the 1.1480-1.1485 area, represented by the Bollinger Band upper band. A sustained break above this zone is needed to potentially trigger a move towards the 1.1520 target area. The Bollinger Band middle band around 1.1430 acts as a core pivot for bullish and bearish forces. Immediate static support is identified around the 1.1425 area. A decisive break below this level could increase bearish control, opening the path for a retest of the dynamic support near the Bollinger Band lower band around 1.1370-1.1380.
In summary, while technicals point to a corrective rebound, the Euro has not yet confirmed a decisive trend reversal. The price action is more indicative of a recovery phase following concentrated selling rather than a definitive turning point. The near-term direction is likely to be dictated by the interplay between technical levels and fundamental drivers, including the ECB meeting and energy price developments.
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