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- EUR's ZEW gains fade ahead of central bank and tariff decisions.
- ZEW index bounces in November as economic outlook stabilises.
- But Fed to leave U.S interest rates in “good place”, supporting USD.
- While ECB goes nowhere fast and Trump’s China tariff threat lingers.
- EUR/USD range-bound Tuesday, with possibility of volatility up ahead.
The Euro drew only a limited boost Tuesday from a sharp rise in November’s Leibniz Centre for European Economic Research (ZEW) survey, as markets await central bank decisions on both sides of the Atlantic and amid a lingering threat that more U.S. tariffs could hit China’s exports in the coming days.
Germany’s ZEW institute said Tuesday that analysts become more optimistic in their assessment of their current economic situation as well as the outlook in November, before announcing matching improvements for the Eurozone.
The ZEW’s current situation index for Germany rose 4.8 points to -19.9 last month while the expectations index, which measures optimism about the outlook over a six month period, rose 12.8 points to 10.7. This is the first time the expectations index has sat above the zero threshold since March 2018.
The current situation index rose 4.9 points to -14.7 for the Eurozone while the expectations index gained 12.2 points and was left sitting at 11.2. Survey respondents cited stronger-than-expected German trade surplus in October and steady Eurozone GDP growth in the third-quarter for their optimism.
“Investor sentiment data are not always a reliable guide to the economic surveys, but the recent rebound in the ZEW and Sentix suggests that the recent tepid recovery in the manufacturing PMI will continue this month,” says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.
Tuesday’s figures are the latest in a growing line of signs that a modest economic recovery could be lurking in the long grass of 2020. The Sentix investors confidence index pointed last month to a pick-up in activity next year while various forward-looking measures of activity in the German and Eurozone manufacturing industries have also turned higher in recent months - including the IHS Markit Manufacturing PMIs and Ifo Institute measures of new order intakes in the factory sector.
Above: Euro-to-Dollar rate shown at hourly intervals.
Signs of recovery will be welcomed by policymakers because Europe’s economy has slowed sharply in the last year, undermining the outlook for inflation and leading the European Central Bank (ECB) to cut interest rates and to restart the quantitative easing (QE) program that was wound up last December. That policy action is weighing on the Euro, which offers investors who own it yields that are mostly negative and a lot worse than what’s on offer in North America.
However, and as much as a 2020 economic thaw could eventually be supportive for the Euro, the single currency is tipped to tread familiar ranges over the coming days as markets digest the latest Federal Reserve (Fed) and ECB interest rate decisions while waiting to hear what President Donald Trump will do about the already-scheduled December 15 implementation of new tariffs on all of China’s remaining exports to the U.S.
“Given the generally uninspiring EZ data and little prospects for a change in the ECB stance any time soon, the impact on EUR should be limited. EUR/USD to remain in a fairly tight range today (yet again),” says Petr Krpata, chief EMEA strategist for FX and bonds at ING.
The Fed is expected to leave its interest rate unchanged at 1.75% at 19:00 Wednesday and to reiterate the new strap-line of rate setters, which is the assertion that the U.S. economy and interest rates are in a “good place” and that it would take a material reassessment of the outlook in order to change that.
Above: Euro-to-Dollar rate shown at daily intervals.
A blowout November non-farm payrolls report and inflation that is already closing on the 2% target could both mean the Fed’s recent ‘dovishness’ all but disappears on Wednesday, which might offer support to the higher-yielding greenback and weigh heavily on the Euro-to-Dollar rate in the coming days.
Any weakness may be tempered on Thursday by the 12:45 rate announcement of the ECB which could see the new monetary policy chief, Christine Lagarde, acknowledge a third quarter stabilisation of the Eurozone economy before playing for time by reiterating her already-expressed intention to carry out a strategic view of the ECB’s current policy settings. That wouldn’t necessarily give investors any reason to buy the Euro, but it might weaken the case for selling it especially if the statement reinforces the prevailing wisdom that Eurozone rates have gone as low as they are likely to.
“For this week, the most important thing to watch is whether the US tariffs on Chinese goods that are scheduled to go into place on December 15th are either delayed or cancelled,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. “Indeed, this round of tariffs could hurt both sides more so than prior rounds. Consider that the bulk of these goods are consumer goods rather than capital or intermediate goods which implies that the effect should be felt on US consumers in the months to come.”
A new 15% tariff is due to hit more than $150 bn of Chinese exports to the U.S. from Sunday, 15 December unless President Donald Trump says otherwise. He and Commerce Secretary Wilbur Ross have both said recently that without the much-vaunted ‘phase one deal’ to end the trade war, those tariffs will go ahead. And on Tuesday that deal was still elusive, with no word from the White House of a delay to implementation.
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