Euro-Zone Confidence Remains High Ahead of Next Week’s ECB Meeting

Talking Points

- Economic sentiment and the business climate in the Euro-Zone improved again in August ahead of next Thursday’s ECB meeting.

- The central bank is expected to hint at a tightening of monetary policy and if it fails to do so that would likely hit the Euro.

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Confidence in the Euro-Zone remains high ahead of next week’s meeting of the European Central Bank’s rate-setting Governing Council, according to the latest official data. At Thursday’s get-together, ECB President Mario Draghi and his colleagues may well decide to pave the way for a so-called tapering of the monetary stimulus it currently provides, probably early in the new year.

The prospect of a cut in the ECB’s asset-purchase program should support the Euro but arguably current Euro exchange rates are already factoring in a tightening of monetary policy – suggesting a downside risk if the ECB fails to hint at a reduction and Draghi steers clear of it in his post-meeting press conference.

That would still leave the ECB with the opportunity to steer the markets towards a tightening of policy at the following General Council meeting on October 26 although doubts remain as to whether a tapering of monetary stimulus is appropriate given that a stronger Euro has already tightened policy indirectly.

The latest European Commission data showed its business climate indicator rose to 1.09 in August from a revised 1.04 in July, well above the 1.05 consensus forecast. Economic sentiment improved to 111.9, up from a revised 111.3 and higher than the 111.3 predicted, and there were improvements too in industrial, services and consumer confidence.

Economic sentiment in August was its highest in more than 10 years. In response, though, EUR/USD was little changed after its modest retracement earlier in the European session.

Chart: EUR/USD Five-Minute Timeframe (August 30, 2017)

Chart by IG

Those falls followed the climb in EUR/USD Tuesday to above the psychologically important 1.20 mark to its highest level since December 2014. EUR/GBP reached its highest level for almost eight years barring the “flash crash” in sterling in October last year.

Elsewhere, the DAX index of German stocks climbed back above the 12,000 mark before dipping back below it. It fell Tuesday on the general market “risk off” sentiment that followed North Korea’s latest missile launch.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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