Sentiment Worsens Citing Higher Energy Costs, Reduced Profitability
- EU ZEW Economic Sentiment Index (AUG): -54.9 vs -57 exp
- German ZEW Economic Sentiment Index (AUG): -55.3 vs -53.8 exp
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Energy Costs to Eat into Bottom Line
- Stubbornly high inflation and anticipated increase in energy costs is expected to weaken profits in the private consumption sector
- Already weak economic growth expected to decline further
- However, expectation for the financial sector are improving due to supposed increase in short-term interest rates. The ECB is all but certain to raise rates in September.
The ZEW figure for Germany is watched closely by market participants (traders, analysts etc) given the country’s economic importance to the entire euro zone. The July figure printed lower than the lowest point in 2020 – signaling a bleak economic outlook over the next 6 months.
ZEW Economic Sentiment (Germany)
Source: Refinitiv, prepared by Richard Snow
The ZEW Economic Sentiment figure is an aggregation of institutional investors’ and analysts’ 6 month projections of the economy and functions as a reputable leading indicator. The data carries a lot of weight in the industry as the forecasts of future financial conditions are carried out by highly informed individuals by virtue of their jobs.
Immediate Euro Response
The EUR/USD chart revealed an initial move lower, in line with the broader trend but price action soon recovered to levels seen before the data release. Since the data continues to weigh on already weakened fundamentals, I would expect to see further euro weakening particularly as the dollar appears determined to strengthen after the lower CPI print last week encouraged dollar selling in light of the supposed ‘Fed-Pivot’ narrative.
EUR/USD 1-Minute Chart
Source: TradingView, prepared by Richard Snow
| Change in | Longs | Shorts | OI |
| Daily | 3% | 2% | 3% |
| Weekly | -9% | 25% | 3% |
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--- Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
