Sentiment In Europe Is Shot!
We have just received the latest ZEW sentiment readings in Germany and EU wide, and they do not make for pleasant reading. True that these surveys are secondary to that of the IFO in Germany, yet July's reading of 72.4 vs 80.6 (78.2 expected) shows the outlook is significantly downbeat. We can put this squarely down to the potential trade wars which are in the making since the imposition of tariffs by the US some weeks back.
Given Germany relies heavily on its exports, this was to be expected to some degree. Even so, the concerns reflected in these weak numbers suggest the latest drop in the pace of economic activity may last a little longer. The ZEW have also noted that political uncertainty played a major part in the sombre outlook, with the German coalition having fallen out over issues centring on immigration. Nevertheless, trade tensions are the biggest risk going forward, as they are for any major exporting nation.
The EUR has softened a little on the numbers, with the USD rate now eyeing a move on 1.1700. We note some support here which may prove temporary. While EUR/CHF, which is a strong bell-weather for EUR sentiment, is also turning back off early gains, though modestly so as yet.
This all plays into the hands of the USD which stands out as a major economic force. The Fed stand behind it and are ready to hike rates. The picture is less clear for the ECB, who through president Draghi, maintained there is little room for movement until after the summer of next year. Consequently, policy divergence may weigh on EUR/USD, and even EUR/GBP, though the latter looks well cushioned ahead of 0.8800 as we have already noted.