What Are The Markets Facing?

Sentiment amongst German businesses is likely to turn more pessimistic in June, according to the IFO survey. The figure is scheduled to be released at 04:00 EDT, and this release tends to be a significant market-mover for the EUR/USD pair on a very short-term basis. Given the surge in oil, broad indications of mounting inflation pressures, slowing in the Euro-zone’s economies, and the European Central Bank’s staunchly hawkish bias over the survey period, the IFO reading is likely to fall in line with – if not more than – expectations. Furthermore, we saw that last week’s ZEW survey of German financial analysts slipped more than anticipated, weighing the risks for the IFO survey further to the downside. However, at the same time, the preliminary reading of the Euro-zone’s purchasing managers index (PMI) for the services sector will be released. The index is expected to ease slightly lower to 50.5 from 50.6, but the key here will be to see if it is above or below 50, as the former will indicate expansion in the sector, while the latter will signal contraction. The Euro-zone service PMI has barely managed to hold above 50 since the beginning of the year, suggesting that weakness in the sector will likely weigh on expansion as a whole throughout the region. Nevertheless, the German IFO survey will likely have the greatest impact on the European markets on Monday morning, unless PMI services misses forecasts by a wide margin.

Bonds – 10-Year German Bund Futures

As speculation of a rate hike by the European Central Bank mounts, German Bunds have plunged to nearly one-year lows of 109.65. However, signs of weakening growth could help Bunds recover, as the German IFO survey and Euro-zone service PMI are both anticipated to fall lower. Near-term resistance looms above at 110.75.

FX – EUR/USD

EUR/USD continues to consolidate within a wide range of 1.5350 – 1.5800, as the US dollar has weakened over the course of the week on easing speculation that the Federal Reserve is so hawkish that they will hike rates on June 25. Looking ahead to Monday, the releases of the German IFO survey and Euro-zone service PMI are both expected to fall lower, suggesting growth in the Euro-zone is deteriorating further. If the figures drop in line with or more than expected, EUR/USD could break above near-term resistance at the 50 SMA to target 1.5710, though sharp gains could reach for 1.5800. On the other hand, stronger-than-expected figures could send EUR/USD tumbling toward 1.5575.

Equities – Xetra DAX Index

The Xetra DAX index failed to break above resistance at the confluence of the 100 SMA and the 38.2 percent fib of 6,167 – 7,231 at 6,808/25. Given the sharp declines seen on Friday, the DAX could simply consolidate above near-term support at the 61.8 percent fib at 6,574 on Monday. Nevertheless, traders should keep an eye on financial market news, as indications of distress amongst financial institutions could trigger widespread sell-offs in the global equity markets (and for that matter, forex carry trades). Furthermore, Monday’s releases of the German IFO survey and Euro-zone services PMI could weigh on stocks, as the data is likely to reflect worsening sentiment and slowing growth.

Terri Belkas is a Currency Strategist at FXCM.