Euro-zone GDP expanded steadily in Q2 as higher energy prices had little impact on household consumption or business activity. The strength of July’s business and consumer surveys suggests that the economy will continue to grow in the second half of the year. Moreover, the increase in inflation since March has been confined to energy prices and we expect the headline rate to rise only fractionally in the coming months before falling next year. Absent a renewed surge in energy prices, this means the ECB is likely to leave rates unchanged or raise them by only another 25bp. Reflecting this, we think government bond yields will decline and the euro will fall against the dollar. Euro-zone equities will underperform as the AI rally dominates the global equity markets.
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