The German ZEW Economic Sentiment Index is based on a monthly survey of institutional investors and analysts and their views of the German economy. A reading that is higher than the market forecast is bullish for the euro.

Here are all the details, and 5 possible outcomes for EUR/USD.

Indicator Background

The German ZEW Economic Sentiment surveys financial experts for their assessment of the direction of economy in the next six months, based on economic data including inflation, exchange rates and the stock market. This makes the index an important indicator of the medium-term future of the German economy.

The indicator has been on a steady downward trend since last December, dropping to 43.2 points last month. This was well below the estimate of 46.3 points. The softer releases are expected to continue in April, with an estimate of 41.3 points.

Sentiments and levels

Draghi’s “bomb” led to the euro taking a tumble last week. Draghi made it clear that a move is imminent and markets certainly believe him. In theory, a lower value of the euro during May could push inflation higher, and this in turn can push back a move. However, given recent trends, inflation remains low and this will probably be confirmed once again.

In the US, the economy has not shown strong growth, but continues to improve steadily. This appears to be enough for the QE tapering scheme to continue and this leaves the euro to its vulnerabilities. So, the overall sentiment is neutral on EUR/USD towards this release.

Technical levels, from top to bottom: 1.3865, 1.3830, 1.3785, 1.3740, 1.37 and 1.3650.

5 Scenarios

  1. Within expectations: 38.0 to 44.0: In such a case, the euro is likely to rise within range, with a small chance of breaking higher.
  2. Above expectations: 44.1 to 47.0: An unexpected higher reading can send EUR/USD above one resistance line.
  3. Well above expectations: Above 47.0: This would indicate some growth and confidence in the German economy. A second resistance line might be broken on such an outcome.
  4. Below expectations: 35.0 to 37.9: A sharper decrease than forecast could send the pair below one support level.
  5. Well below expectations: Below 35.0: In this scenario, the euro could break below a second support level.

Story by Forex Crunch

Gary Beal