Euro slides below 1.08 level on soft ZEW sentiment data

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19 February 2020

thomasdodds

The euro edged below the 1.08 level against the US dollar for the first time since April 2017 on Tuesday, dragged lower by more signs of weakness in the Euro Area economy.

F
ollowing on from recent underwhelming GDP growth, industrial production and retail sales data, yesterday’s ZEW sentiment indices all fell well short of expectations. The main economic sentiment index for the Eurozone slumped to just 10.4 in February, well short of the level of 30 that investors were expecting and its lowest level in three months. The German index fared just as badly, sliding to 8.7 in February, well short of January’s 26.7 reading.

Figure 1: Euro Area ZEW Economic Sentiment Index (2013 – 2020)

According to ZEW President Achim Wambach, ‘the feared negative effects of the Coronavirus epidemic in China on world trade have been causing a considerable decline of the ZEW Indicator of Economic Sentiment for Germany’. As we have noted in the past few days, the Euro Area is one of the more exposed to uncertainty surrounding the virus than many of its peers, given the bloc’s high dependence on external demand, meaning that the recent weakness in the common currency is not all that surprising.

It is worth noting, however, that fears regarding the coronavirus outbreak are continuing to abate, which may start filtering its way through to a recovery in the euro. The death toll edged above 2,000 yesterday. That being said, the number of confirmed cases appears to be plateauing, with the ratio of those fully recovered to decreased now standing at almost 7.5:1. This supports our view that we think we’re likely to see a repeat of the SARS virus, in which we have lots of negative headlines, but no meaningful impact on financial markets or the global economy.

Jump in UK inflation cools BoE rate cut chances

A jump higher in UK inflation failed to support the pound this morning, which slipped back below the 1.30 mark this morning.

UK headline inflation increased to 1.8% in January, its highest level in six months and a sharp increase on the multi-year low 1.3% notched in December. While much of the increase was due to a jump in fuel prices, the core inflation rate, which strips out volatile priced components such as fuel and energy, also increased back up to 1.6%. This increase in price growth to just shy of the BoE’s 2% target supports our view that lower rates from the Bank of England are unlikely in 2020.

Next up for the pound will be tomorrow’s retail sales data, followed by Friday’s business activity PMIs.