Euro-zone ZEW Survey (FEB) (10:00 GMT; 05:00 EST)
Expected: -43.0
Previous: -41.7

German ZEW Survey (FEB) (10:00 GMT; 05:00 EST)
Expected: -45.0
Previous: -41.6

What Are The Markets Facing?

Investor sentiment throughout the Euro-zone is anticipate to deteriorate further, as the German ZEW survey is forecasted to fall for the ninth straight month to a 15 year low of -45.0. The news will not be entirely surprising, as the European Commission’s most recent surveys of consumer, economic, industrial, and services sector confidence all dropped more than expected. Indeed, building price pressures are hurting disposable income for consumers and denting profit margins for businesses, and things are only getting worse. The European Commission’s flash estimate for January CPI surprisingly rose to a 14-year high of 3.2 percent, which leaves the European Central Bank very little room for maneuver regarding monetary policy. However, given ECB President Jean-Claude Trichet’s press conference comments last week, it appears that the central bank may be backing away from their staunchly hawkish tone as he dropped the phrase noting that the “Governing Council remains prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialize.” Furthermore, Trichet’s commentary showed a pronounced concern about the “reappraisal of risk” as he said there was “unusually high uncertainty about its overall impact on the real economy.” Moreover, the ECB’s outlook sounded dour as Trichet cited incoming data as having “confirmed that the risks surrounding the outlook for economic activity lie on the downside.” Overall, Tuesday’s sentiment data will likely highlight the dim prospects for the Euro-zone, and if the figures are worse-than-expected, markets may start to bet that the ECB will seriously consider cutting rates within the next few months.

Bonds – 10-Year German Bund Futures

Bunds continue to aggressively test the 117.50/55 level as the ECB’s more neutral stance is helping to keep the contract’s uptrend intact. Upcoming data may add to gains as well, with the ZEW survey of investor sentiment forecasted to deteriorate further. Though Euro-zone CPI remains well above the ECB’s comfort zone, increasing downside risks to growth may lead the markets to consider the possibility of a rate cut in the near term. As a result, Bunds may push through 117.50/55 towards the 118 level. On the other hand, a bounce in equity markets or a surprisingly strong ZEW reading could weigh the contract back down towards trendline support at 117.

FX – EUR/USD

Although the ECB left rates unchanged on February 7, the EUR/USD sold off more than 200 points as ECB President Jean Claude Trichet - who had previously been staunch in his hawkish stance – shifted his focus to the uncertainty amidst instability in the financial markets and the growing downside risks to the economy. Since finding support at the 1.4450 level, the Euro has steadily gained as subsequent commentary from Trichet has reaffirmed his commitment to maintaining price stability, which has led investors to believe that the ECB will remain neutral in coming months. However, upcoming data could remind traders that economic conditions are deteriorating as the German and Euro-zone ZEW surveys are expected to print lower. On the other hand, a better than expected print may help the Euro to rally towards 1.4600, especially if broad US Dollar weakness feeds throughout the forex markets. Furthermore, as long as the ECB remains vehement in its resistance to cutting rates, negative fundamental data out of Europe may not impact the EUR/USD as severely as positive surprises.

Equities – Xetra DAX Index

The Xetra DAX Index has steadily declined since running into resistance just above 7,000 last week as the unwillingness of the ECB to step in by cutting interest rates has hurt sentiment amongst those in the equity markets. Indeed, the Euro-zone and German ZEW surveys of investor confidence are expected to reflect widespread concerns regarding economic conditions. The news will only feed into the pessimistic stance of the markets and could send the Xetra DAX below recent support near 6,680/90 towards the January low of 6384.40.

Terri Belkas is a Currency Strategist at FXCM.