Judging by the second-quarter GDP data, the Eurozone is holding up well in the face of the Iran war shock, with the economy growing twice as fast as expected, up 0.4% from the previous quarter.
Markets, however, have barely reacted: the euro edged only slightly higher, while interest rate pricing stayed largely unchanged from Wednesday, as dovish signals from the Fed seem to have pulled global rate expectations lower, offsetting the positive growth surprise.
Still, the figures may bolster the hawks’ argument that the Eurozone economy is resilient enough to withstand further tightening, keeping another ECB rate increase in September firmly on the table – particularly if hostilities in the Middle East persist.
Continued conflict remains a key risk to growth, given its impact on energy costs, as the Eurozone is a net energy importer. While oil prices eased from their highs, they remain elevated and volatile, and natural gas prices have trended up to 3.5-year highs, adding to concerns.
