- Eurozone ZEW Economic Sentiment worsens
- German ZEW Economic Sentiment improves but remains negative
- The ECB rate decision is up in the air and could go to the wire
- EUR/USD is testing support at 1.0732. Below, there is support at 1.0654
- There is resistance at 1.0777 and 1.0855
The euro started the week higher but reversed directions on Tuesday and pared most of those gains. In the North American session, EUR/USD is trading at 1.0709, down 0.38%.
German and Eurozone Confidence Data Indicate Pessimism
There hasn’t been much to cheer about with regard to German and eurozone data lately, so it’s no surprise that the ZEW Economic Sentiment indexes remain stuck in negative territory. The eurozone ZEW declined to -8.9 in September from -5.5 in August and missed the consensus estimate of -6.2. The news was a bit better in Germany, which improved from -12.3 to -11.4, above the estimate of -15. The outlook is quite gloomy, with inflation relatively high and the ECB contemplating further rate hikes.
The ECB meets on Thursday and it remains unclear what Lagarde & Co. will decide. The markets are split. with a rate hike priced at 45%, which would raise the benchmark cash rate to an even 4.0%. The central bank has been aggressively raising rates, with no pauses in the current tightening cycle. Still, inflation has proven stickier than expected and is currently at 5.3%, nowhere near the ECB’s 2% target. Germany is grappling with an inflation level of 6.2%.
The slowdown in the German and eurozone economies is a strong factor in favor of the ECB taking a pause, as further rate hikes could trigger a recession. ECB hawks argue that inflation has to be contained as priority number one, while the doves counter that weaker growth means inflation will continue to fall on its own and a pause would provide some relief to businesses and households. ECB President Lagarde has a difficult rate decision on her hands and the live decision could mean some volatility for the euro after the rate announcement.