Trading the German ZEW Sentiment Survey

The lack of any pertinent economic information has placed emphasis on the upcoming ZEW survey for Germany – scheduled for release tomorrow morning. With the advent of several key fundamental policies and measures, probabilities are high that the recent uptick in December is likely to be duplicated. The notion would be supportive of a break higher for the single currency – past resistance at 1.3400.

Optimistic Drivers

Economic sentiment portrayed by the European investment community is anticipated to improve once again, to a reading of 12.2 in January. The uptick will match the 6.9 witnessed in December, and make it the second monthly improvement.

The advance in sentiment is likely to have been bolstered by recent comments by European Central Bank officials. Previously noting that contractionary conditions are likely to persist in the long term, policymakers highlighted near term developments that have lent support for a positive turnaround in the European Union. This would represent an overall improvement, even if the EU is still anticipated to contract by 0.3% in 2013. The notion has dispersed previous speculation that rates may be cut by 25 basis points in the near future.

Subsequently, the improving economic landscape has led to a lowering of short term and long term EU yields. This has sparked a renewed confidence in regional debt and bolstered demand for future issues in troubled or periphery nations.

Most notably, the focus has placed optimistic emphasis on recent on-the-run yields and debt auctions from Spain - both indicating a decline in credit risk. Rising demand for Spanish debt has lowered benchmark market 10-year yields from a record 7.76%, to the current 5.16%.

What to Expect

Given the mounting expectations of a positive print, a lower than expected release would be extremely detrimental to the single currency – particularly against the US dollar - ahead of key technical resistance.

At or Above 12.2. This scenario would be widely bullish for the Euro as it would serve as confirmation of a supported turnaround in sentiment for the investment community. Subsequently, the positive release alludes to further demand down the road for EU debt, improving the investment landscape and attractiveness of EU investments.

Below 12.2. Not as bullish as an above estimate release, a positive reading would still support an appreciating single currency. Unfortunately, without stronger conviction in the survey, expect the 1.3400 to prove arduous for those long the EURUSD.

Below Zero. The worst case scenario, a release below zero would shatter recent positive sentiment towards the single currency, setting up speculation of further pessimistic releases down the road. This would shift focus to the IFO business survey later this week – anticipated to show only a slight improvement.