Eurozone GDP doubles forecasts, lifting ECB rate hike odds

The Eurozone economy grew by 0.4% quarter-on-quarter in the second quarter of 2026, double the median forecast of 0.2% and the fastest pace of expansion in nearly two years, bolstering expectations that the European Central Bank will raise interest rates again next month.fxstreet+1

Second estimates due later this week are expected to confirm the figures, with the annual growth rate hitting 1%. The stronger-than-anticipated performance has pushed the probability of a 25-basis-point rate hike at the ECB's September 10 meeting to around 80–83%, according to futures markets and analyst estimates, with roughly even odds of a further increase in December.xtb+1

Germany Defies the Gloom

Germany, the bloc's largest economy, contributed to the surprise by posting 0.2% quarter-on-quarter growth in Q2 after expanding 0.4% in Q1, producing cumulative first-half growth equivalent to roughly 1.2% on an annualized basis. An analysis published Monday by DWS argued that "the current economic reality is considerably less negative than prevailing sentiment would suggest," noting that the Eurozone Economic Surprise Index has swung from around negative 80 points in May to positive 66 recently, surpassing the equivalent U.S. indicator.thecorner

Rate Path Divides Economists

The ECB paused its tightening cycle in July after raising its deposit rate by 25 basis points to 2.25% in June — its first hike in three years. Morningstar chief market strategist Michael Field said a September increase to 2.50% is "very likely," with "almost a 50/50 chance of a further rate increase in December, bringing the deposit rate to 2.75%." But Bastian Freitag of Rothschild & Co Wealth Management Germany cautioned that the market may be underestimating the chance the ECB holds, arguing that inflation remains largely energy-driven with "neither rising inflation expectations nor rising wage growth" to justify persistent tightening.global.morningstar

Headwinds Cloud the Outlook

Despite the upbeat data, risks are accumulating. Rabobank senior FX strategist Jane Foley warned that the breakdown of the U.S.–Iran agreement, the near-closure of the Strait of Hormuz, and competition from China all pose downside threats. Germany's adjusted unemployment rate ticked higher in July to 6.4%, pushing total unemployed above three million on an unadjusted basis — a development Foley said "suggests that consumer spending could stagnate for the rest of the year."fxstreet

Brent crude closed last week above $80 per barrel amid stalled Middle East diplomacy, and euro area headline inflation rose to 2.9% in July, with core inflation edging up to 2.5%. ECB President Christine Lagarde has stressed the bank is "closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects."xtb+1

The EUR/USD pair held above $1.155 on Monday, near a three-week high, as markets weighed the competing forces of resilient growth data and an uncertain geopolitical backdrop.tradingview