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Buoyant Euro-Zone Confidence Keeps Tighter Monetary Policy in Focus

Buoyant Euro-Zone Confidence Keeps Tighter Monetary Policy in Focus

Martin Essex, MSTA, Analyst

Talking Points

- Economic sentiment in the Euro-Zone improved by more than expected in September, to its highest level since July 2007, according to a European Commission survey.

- That makes a tightening of monetary policy by the European Central Bank likely next year.

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EUR/USD was firmer Thursday after its recent losses as a survey by the European Commission confirmed that confidence in the Euro-Zone was buoyant in September, making it likely that the European Central Bank will continue with its plan to look at a tightening of monetary policy this autumn ahead of a possible move next year.

Economic confidence climbed to 113 in September from 111.9 in August, comfortably above the consensus forecast of 112. There were larger-than-expected increases too for the Commission’s business climate indicator as well as for industrial and services confidence. Consumer confidence improved too, in line with an earlier preliminary figure.

In response, EUR/USD rallied after three successive days of losses.

Chart: EURUSD Five-Minute Timeframe (September 28, 2017)

Buoyant Euro-Zone Confidence Keeps Tighter Monetary Policy in Focus

Chart by IG

Inflation expectations picked up as more consumers expected prices to rise over the next 12 months, with the indicator climbing to 14.2 from 11.6 in August.Also, in industry, manufacturers expected their selling prices to increase, with the index rising to 10.5 from 8.1.

Earlier, ECB Chief Economist Peter Praet said the central bank’s policymakers will discuss a recalibration of monetary measures this autumn, not an exit from stimulus. Speaking in Berlin, he said: “I am not talking about exit, I am talking about recalibration”. The ECB has already said it will discuss in the autumn whether to reduce its measures to stimulate the Euro-Zone economy from next year.

However, ECB policymaker Erkki Liikanen was more dovish, saying that Euro-Zone inflation will return to target slowly and that very substantial monetary accommodation is therefore still needed.

Separately, a group of Germany’s leading economic institutes said the ECB should prepare for exit from its very expansive monetary policy regime and particularly from its “unconventional” measures. It should announce a tapering of its asset-purchase program from the beginning of next year if economic conditions remain favorable, the institutes said.

--- 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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