So far this year, the EUR has been weakening against its major counterparts.
Unfortunately for euro bulls, there isn’t much in the way of news this week that might invert the fundamental scenario. Technical analysis also shows that the is euro under pressure.
The only major event for the week is the publication of the ZEW Economic Sentiment survey. This gives some important insight into how the German and eurozone economy is performing. It also indicates what expectations are for the next six months.
Analysts and traders are especially interested in the forward-looking component. This is because it’s an indicator of how willing major institutions are to take on risk and make new investments.
Often, it can predict swings in the economy in advance.
What We Are Looking For
Expectations are for economic sentiment in Germany to remain positive, but fall back a bit compared to the recent positive.
What usually moves the markets is the Economic Sentiment Indicator (ESI). Projections are for this to come in at 19 compared to 26.7 in the prior measurement. That would put it firmly in growth territory if less optimistic than before.
The survey is usually conducted in the two weeks ahead of the release. And, during that time, the potential effect of the coronavirus was dominating the news.
There were also increasing concerns over maintaining the supply chain, with many factories in China closed. However, the prevailing consensus among most industry leaders was that there would be a V-like impact, with a quick return to normal once the situation is handled.
So, we would expect the current situation indicator to reflect more the effect of the virus outbreak than the ESI.
Expectations also indicate that the ZEW Economic Situation (which measures the perception of the current situation) will improve to 3 from -9.5.
That would continue the recent trend where the outlook was better than the current situation. Generally, this could be indicative of a strengthening euro. This is because it would imply that the expectations are for the economy to improve going forward.
The other measure that comes out at the same time is the ZEW Economic Sentiment Indicator for the entire eurozone. Generally, it tracks the German indicator, and we wouldn’t expect it to affect the market unless it was substantially out of line with the other measurements already mentioned. The consensus is for it to stay in growth and actually improve to 30 compared to 25.6 prior.
Germany’s GDP for the fourth quarter was a disappointment. It came in with flat growth in the flash reading.
This would put the largest economy of the eurozone effectively one decimal away from a technical recession.
Going forward for the euro, the next cloud on the horizon is the ECB’s strategic review process. We can expect this to provide new policy guidelines for the bank.
Until then, expectations are for rates to remain on hold. With little expectation of spending increases in Germany, the fundamental situation for the euro could remain bearish for quite some time.