The Euro Consolidates Following Slump in Confidence


EUR/USD hit an intraday low at 1.1250 following the German ZEW miss, though the euro had been under pressure ahead of the release following the earlier short-lived spike to 1.1329. Markets are bracing for the FOMC meeting in the U.S., which starts today and concludes tomorrow and, while no policy change is almost assured, the Fed is likely to open the way for a rate hike in September or October. The Greece situation is also drawing rapidly nearly to a head. Overall, this backdrop should keep EUR/USD under pressure.

German ZEW investor confidence dropped to 31.5 from 41.9 in May. A much sharper decline than anticipated, and the third consecutive drop in investor sentiment. The ZEW said external developments are limiting the room for a further improvement of the German economy, first and foremost the ongoing uncertainty about Greece’s future in the Eurozone, but also the weak dynamic in the world economy. The assessment of the current economic situation in Germany also dipped slightly to a still very high 62.9. Expectations for developments in the Eurozone as a whole also came off. Optimists outnumber pessimists, but the developments highlight that while growth is broadening there is no further strengthening for now as uncertainty weighs.

German May HICP inflation rose to 0.7% year over year, in line with the preliminary reading and up from 0.3% year over year in April. The national CPI rate also rose to 0.7% year over year. Headline rates are still held down by lower energy prices, which dropped 5.0% year over year in May. Excluding energy the national rate would have been at 1.3% year over year. Still, the decline in annual energy price inflation is slowing down as base effects start to drop out of the equation, which together with the drop in the EUR is pushing headline rates higher not only in Germany. Strong consumer demand and expected substantial wage gains this year are likely to keep German inflation above the Eurozone average, while the ECB’s accommodative policy is adding to price pressures, although this especially in the real estate market.

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