To help educate you, my beloved students, I have decided to organize today's report in a question-and-answer format. I even threw in a nice image for those of you who like them visuals.
I've provided two types of answer. The first is a straight-from-the-book answer for all you economics junkies. The second is a "street" answer" for my homies who wanna keep it real.
What exactly is the ZEW Economic Expectations report?
Formal Answer: ZEW stands for Zentrum für Europäische Wirtschaftsforschung and it is a center for European Economic Research. The ZEW economic expectations report is a leading indicator of the euro zone's economic health based on surveyed investors and economic analysts. It measures the 6-month outlook for the euro zone based on a number of factors, such as industry growth, sentiment, interest rates, etc.
Street answer: It measures how fly investors think the euro zone hood will be over the next 6 months.
How is the ZEW report measured?
Formal Answer: The baseline score is 0.0. Scores above 0.0 indicate optimism (higher scores = more optimistic), while scores below 0.0 reflect pessimism (lower scores = more pessimistic) over the economy.
Street answer: 0.0 = Kristen Stewart. Above 0.0 = Scarlett Johansonn. Below 0.0 = Kirsten Dunst.
Why the focus on Germany?
Formal answer: The ZEW reports tend to focus on Germany's economy, primarily because it is the largest economy in the euro zone. It has the biggest impact in terms of political will and economic might, and sets the overall direction of the euro zone.
Street answer: Germany is just like Kobe. Sleek. Efficient. Powerful. A winner. Where Kobe go, the Lakers go. Same with Germany and the euro zone.
How effective is the report as a leading indicator and how do I use it to trade?
Formal answer: Looking at the chart above, we can see that a trend in the ZEW index has been followed by a trend in EUR/USD at least five times in the past nine years. Given that a lot of other big factors influence the most closely watched pair in forex trading, five times isn't too bad.
If the outlook for the euro zone economy is looking bright, then consumption and spending should pick up, which should then lead to an increase in GDP. This should be bullish for the euro.
The opposite should happen when investors begin to become pessimistic.
Street answer: It's like this homie. If ZEW is trending up, holla at the euro. If ZEW is trending lower, bust a cap on the euro.