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Trading News Report

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German ZEW Survey on Tap − How Will The Euro React?

Tue, Nov 11 2008, 05:44 GMT
by Daily FX Research Team

DailyFX

The German ZEW investor confidence survey is likely to spur increased selling pressures for the euro as the outlook for Europe’s largest economy turns bleak. Economists predict the index to remain near the record low reading of -63.9 in July as they expect investor sentiment to hold at -63.0 for the second straight month, but the release may fail to meet expectations as economic conditions deteriorate at a record pace.

Trading the News: German ZEW Survey (Economic Sentiment)

What’s Expected

Time of release: 11/11/2008 10:00 GMT, 05:00 EST

Primary Pair Impact : EURUSD

Expected: -63.0

Previous: -63.0

Effect the German ZEW Survey had over EURUSD for the past 3 months

The German ZEW investor confidence survey weaken to -63 from -41.1 in September as fears of a global meltdown intensified. The ongoing turmoil in the financial markets paired with the slowdown in the global economy has certainly fueled concerns that Germany may slip into a recession in the third quarter, which could lead the ECB to ease policy further in over to stave off further downturns in the economy. On October 8th, President Trichet joined Fed Chairman Bernanke in a coordinated rate cut to lower the benchmark interest by 50bp to 3.75% from 4.25%, and could be forced to increase their efforts even further as market participants expect Germany to slip into a technical recession in the third quarter. As the ECB continues to hold a dovish outlook, the euro is likely to weaken further over the coming months.

September 2008 German ZEW Survey (Economic Sentiment)

Investor sentiment in Germany improved for the second consecutive month as falling commodity prices helped to raise growth forecasts for Europe’s largest economy. The ZEW survey rose to -41.1 from -55.5 in August despite expectations for a reading of -53, but conditions may only get worse over the coming months as Germany teeters on the brink of a recession. The slowdown in the global economy paired with the downturn in the financial market has certainly hampered growth forecasts for Europe’s largest economy, and could lead the European Central Bank to focus on growth even as inflation remains well above the bank’s 3% target. Moreover, fears of a worldwide recession has intensified as Lehman Brothers filed for bankruptcy, and conditions may only get worse as the repercussion effects of the credit crunch spreads throughout the major economies.

August 2008 German ZEW Survey (Economic Sentiment)

The German ZEW survey improved to -55.5 from a record low reading of -63.9 in July as oil prices pulled back from a record high of $147 a barrel. In addition, the depreciation of the euro also encouraged investors to raise their outlook as they expect the cheaper currency to help boost demands from the global economy. Despite the improved outlook held by German investors, the growth outlook for Europe’s largest economy remains dim as the economy contracted 0.5% in the second quarter, and led the European Central Bank to hold a neutral policy stance during the August 7th meeting. Meanwhile, ECB President Trichet noted that economic activity will be ‘particularly weak’ throughout the third quarter, which suggests that the central bank may lower borrowing costs in the coming months in order to avoid a severe downturn in the economy.

How To Trade This Event Risk

The German ZEW investor confidence survey is likely to spur increased selling pressures for the euro as the outlook for Europe’s largest economy turns bleak. Economists predict the index to remain above the record low reading of -63.9 in July as they expect investor sentiment to hold at -63.0 for the second straight month, but the release may fail to meet expectations as economic conditions deteriorate at a record pace. Industrial production in Germany fell at its fastest pace since 1995 as business activity fell 3.6% in September, while factory orders plunged 8.0% during the same period to reach its lowest level in 17 years. In addition, the IFO business confidence index slipped to a five-year low of 90.2 from 92.9 in September, while expectations fell to its lowest level since recordkeeping began in 1991. Furthermore, investor confidence in the Euro-Zone fell to a record low in November as the Sentix survey declined to -36.4 from -27.8 in the previous month. Fading confidence paired with the dour outlook has certainly stoked expectations for further rate cuts by the European Central Bank as President Trichet continued to hold a dovish outlook, and stated that ‘alleviating’ prices pressures would give the central bank room to ease policy further at the December 16th policy meeting. Moreover, Credit Suisse overnight index swaps are showing that market participants expect the ECB to lower the benchmark interest rate by at least 75bp over the next 12 months, which could stoke increase selling pressures for the euro over the near-term.

Despite expectations for further easing by the ECB, an improve confidence reading could spur increased buying pressures for the euro, and would certainly help to improve the growth forecast for Germany. As a result, an unexpected rise in investor sentiment would favor a long euro trade, and we will look for a green, five-minute candle following the release to confirm an entry on two lots of EURUSD. We will place our initial stop at the nearby swing low (or reasonable distance), and this risk will determine our target for the first lot. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Meanwhile, the downturn in the global financial market paired with the ongoing turmoil in the credit sector may continue to weigh on investors, which could lead the index to fall back to its record low or even below it. Therefore, a reading of -63.9 or lower would favor a short EURUSD trade, and we will follow the same setup as the long trade mentioned above, just in reverse.

Published on  Tue, Nov 11 2008, 05:54 GMT