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EUR USD Slumps as US Retail Sales Overwhelm German GDP Figures

The Euro US Dollar (EUR USD) exchange rate struck a new weekly low this afternoon as upbeat German GDP figures weren’t enough to offset a strong rebound in US retail sales.

Euro (EUR) Rallies on Back of Strong German GDP Figures

The Euro was initially able to recoup some of its recent losses against the US Dollar this morning as Germany released another solid growth report.

In its latest GDP estimate Federal Statistics Office suggested that the German economy grew by 0.6% in the second quarter, while it revised its first quarter growth up to 0.7%.

While the pace of growth came in lower than the 0.7% that had been forecast, thanks to a decline in foreign trade, it still painted a healthy picture of Germany’s economy during the April-June period.

However despite missing expectations analysts remain confident that Germany’s economic growth will remain robust over the coming months as record-low employment levels and rising government consumption prompted an upbeat outlook from economists.

Meanwhile today’s strong economic data is also expected to help bolster Chancellor Angel Merkel’s position in the upcoming national election as she reaps the rewards from focusing on Germany’s economy.

Carsten Brzeski Chief Economist at ING Germany said;

‘With today’s strong growth data, it will be hard for any opposition party to pick out the economy as a main theme for the final stage of the election campaign.’

‘Even Angela Merkel’s junior coalition partner, the social-democratic SPD, finds it hard to get the credits from the electorate for the current strong growth performance. When it comes to the economy, it seems as if Angela Merkel sits in a ‘winner-takes-it-all’ position.’

Uptick in Retail Sales Bolsters US Dollar (USD)

The Euro’s gains proved to be short lived however as US retail sales rebounded sharply last month.

According to data published by the US Commerce Department, retail sales grew by 0.6% in July, rallying from a 0.3% contraction the month before and outpacing initial estimates that they would only grow 0.4%.

Areas in which sales saw strong growth were motor vehicles and building supplies, both of which rose 1.2% last month, with the US Dollar climbing as the data appeared to point towards a 3% GDP figure in the third quarter.

The ‘Greenback’ was also strengthened by suggestions that the upbeat sales data, alongside a broader uptick in the US economy at the start of the third quarter may prompt the Federal Reserve to move forwards with plans to raise interest rates despite lacklustre inflation figures.

James Knightley, chief international economist at ING Bank said;

‘Markets continue to focus on current low inflation rates, but with the labour market tightening and the growth story looking ok the prevailing view within the Fed is likely to remain that low inflation is merely ‘transient’. We think inflation will be back at the 2% target by the end of the year and also predict a December Fed rate hike.’

This would be consistent with comments from New York Fed President William Dudley yesterday in which the central bank policymaker suggested that continued economic growth would likely prompt a third rate hike this year despite weak inflation.

EUR USD Forecast: Eurozone GDP to Rise in the Second Quarter?

Looking ahead the EUR USD exchange rate rally tomorrow morning if the Eurozone’s latest GDP estimate shows that economic growth in the bloc rose from 0.5% to 0.6% in the second quarter.

Meanwhile movement in the US Dollar tomorrow is likely to be driven by the tone of the FOMC minutes from the Federal Reserve’s latest monetary policy meeting, with the ‘Greenback’ likely to weaken if the minutes reveal that policymakers remain overly concerned about lacklustre US inflation.

Current Interbank Exchange Rates

At the time of writing the EUR USD exchange rate was trending around 1.1700 and the USD EUR exchange rate was trending around 0.8544.