Euro Braces for German ZEW Survey, Commentary from ECB and Draghi

TALKING POINTS – GERMAN ZEW SUREVEY, ECB, MARIO DRAGHI, BOE, MARK CARNEY

  • ECB officials consider more Eurozone stimulus if outlook worsens
  • EURUSD may suffer if commentary carries pessimistic undertones
  • The German ZEW survey will be closely watched as growth slows

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EURUSD may suffer if ECB officials continue to strike pessimistic undertones regarding future growth and inflationary prospects in the Eurozone. Central Bank President Mario Draghi will be speaking at the annual symposium in Sintra, Portugal shortly before German ZEW survey data is released. Following the publication, BoE Governor Mark Carney and Draghi will both be speaking on a policy panel.

The previous day’s comments alluded to the ECB’s willingness to step in if necessary to provide stimulatory measures to boost inflation and local economic activity. These policies could include cutting rates even further and even the possibility of re-introducing Quantitative Easing. This comes as trade tensions continue to escalate while the probability of a hard Brexit is looking increasingly likely.

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The outcome of the German ZEW survey may amplify pessimistic undertones from monetary authorities if the data falls in-line with policymakers’ fundamental assessment. The current expectations are for a reading of -5.6 which is significantly lower than the previous -2.1 publication. Eurozone inflation expectations are looking grim, with the 5Y5Y Euro inflation swap forward reaching an all-time low at 1.2910.

The EU is also in the midst of negotiating a trade deal with Brazil, which if passed will be the largest trade deal ever negotiated by the EU in regard to the number of tariff reductions. As the US deviates from its role as the chief broker in global trade, Europe is taking up the mantle and is negotiating a trade deal with Latin America’s largest economy. As Brazil slowly opens its economy to the world, the US practices protectionism.

Furthermore, escalating tensions in Iran may translate to cross-Atlantic hostility between the Washington and Brussels. The divergence in policy toward Iran continues to be a lingering risk that could end up becoming part of the terms in reaching an EU-US trade agreement. Compromise – or what some might see as capitulation – from either side is not likely, leading to greater fears of a revived trade war in a slowing global economy.

CHART OF THE DAY: EURO 5Y5Y INFLATION FORWARD SWAP PLUNGES ALONGSIDE EURO-WEIGHTED INDEX

FX TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

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