Getting Ready for German ZEW

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Tomorrow we could get some extra volatility in Euro pairs with the release of key sentiment data from both Germany and the eurozone. Both figures come out at the same time. The market typically focuses on the largest economy in Europe. After risk sentiment getting a boost from Thursday’s ECB meeting, the question is whether that will continue.

The ZEW conducted their survey of major German and European firms in the lead-up the ECB decision. It’s too soon to see an effect from the policy changes in the central bank, of course. But given how strong the consensus was that some kind of easing would be in the offing, German businesses could have had a substantial improvement in their outlook, the portion of the survey that was most negative.

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What We are Looking For

The market usually cares most about the ZEW Economic Sentiment Indicator (ESI). This measures expectations for the next six months. The consensus is for a substantial improvement, but still staying firmly in contraction, at -34.7 from -44.1 prior. This would reverse the trend seen since May when the indicator turned downwards and plunged to the worst result since the Euro crisis of 2011. During that same period, GDP in Germany slipped into negative growth.

Furthermore, the current situation assessment is expected to improve. The projection for the ZEW Economic Situation is -3.2. This would be a substantial improvement from -13.5 in the prior month, yet still in contraction.

ZEW ESI for Europe is expected at -32.2, an improvement also. This is from the prior month’s multi-year low of -43.6.

Rationale

Aside from the effect of the at-the-time expected ECB action, one of the primary reasons to expect improvement in the figures this time around is a reversal in why they came in so bad last time. Last month’s poor result was attributed to a worsened trade dispute as well as increased Brexit uncertainty. The survey was done in the middle of the Parliament prorogation announcement.

Now that it seems the US and China are back at the negotiating table, and Brexit has returned to its normal level of chaos, risk sentiment has improved a bit. This has supported the DAX over the last couple of days, with the ECB measures seen helping the financial sector as well as supplying more liquidity to the market.

It’s Not All That Positive

While the markets might have felt relieved with the ECB’s action, and there is a slightly less negative atmosphere from the trade talks, that doesn’t mean that the concerns of German (and European) businesses have been resolved. Many firms have repeatedly said that regulatory issues are impacting them and that they are finding export difficult. The lower Euro might be helping with the latter, but comparatively the yuan is even lower. German industrial production is “overpriced” on the exchange market, in comparison with other rivals.

Analysts and the markets might be getting ahead of themselves in terms of German industrial sentiment. There is usually a period of euphoria following new QE measures. This data might be a return to reality and disappoint the markets. With expectations of such a large improvement, it’s hard to see a surprise beat. However, a result below expectations would be quite easy.

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