EUR/USD: Trading The German ZEW Economic Sentiment Index

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.

Indicator Background

German ZEW Economic Sentiment surveys financial experts for their assessment of the direction of the German 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 index enjoyed a couple of readings above the 60-point level, but slipped to 55.7 points in January. This was well below the estimate of 61.3 points. The markets are bracing for the downward trend to continue, with an estimate of just 52.8 points. If the index does not meet the forecast, we could see the euro lose ground.

Sentiments and levels

Although the concept of a negative deposit rate has been bandied about by ECB policymakers, no such move appears imminent. On the other hand, we saw verbal intervention last week from Mario Draghi when the euro seemed bent on breaking 1.40, which appears to be a level that the ECB will not tolerate. Has the rally topped out?

In addition, the crisis in Ukraine appears to be getting worse and could still have a negative impact on the common currency. In the US, we have all the reasons to believe a third taper move is coming later in the week. Despite some weak numbers, the Fed is on a tightening cycle and this is USD positive. So, the overall sentiment has turned from bullish to bearish on EUR/USD towards this release.

Technical levels, from top to bottom: 1.4149, 1.40, 1.3940, 1.3895 and 1.3830.

5 Scenarios

1. Within expectations: 51.0 to 55.0: In such a case, the Euro is likely to rise within range, with a small chance of breaking higher.

2. Above expectations: 55.1 to 58.0: An unexpected higher reading can send EUR/USD above one resistance line.

3. Well above expectations: Above 58.0: In such a scenario, a second resistance line might be broken.

4. Below expectations: 48.0 to 50.9: A sharper decrease than forecast could push the pair below one support level.

5. Well below expectations: Below 48.0: A very weak release could rattle the markets, and EUR/USD could break a second support level.