EUR/USD: Trading the German ZEW Jul 2012

The German ZEW Economic Sentiment Index is based on a monthly survey of institutional investors and analysts and their views of the German economy. A reading that is higher than the market forecast is bullish for the euro.

Here are all the details, and 5 possible outcomes for EUR/USD.

Published on Tuesday at 9:00 GMT.

Indicator Background

The German ZEW Economic Sentiment  surveys financial experts for their assessment of the direction of  economy in the next six months, based on economic  data  including inflation, exchange rates and the stock market. This makes the index an important indicator of the medium-term future of the German economy.

The indicator had a very poor showing in June, recording a reading of -16.9 points. The market forecast for the July reading is not much better, with a prediction of -14.5 points. Another weak reading would be a strong indication of deep pessimism about the German economy, which does not bode well for the Euro-zone.

Sentiments and levels

Despite the fanfare  at the EU Summit  and  the Eurogroup meeting which followed, there  was very little progress made in  easing the debt crisis gripping the Euro-zone.  Spain is walking the same dead end path of harsh austerity, and Italy may also need some help soon. Both these large countries  have been  suffering from unsustainable high yields for too long. After the recent interest rate cut and elimination of the deposit rate by the ECB,  money continues flowing out of Europe. A host of weak German economic releases has not helped the situation. So, the overall sentiment is  bearish on EUR/USD towards this release.

Technical levels, from top to bottom: 1.24, 1.2360, 1.2330, 1.2288, 1.22 and  1.2150.

5 Scenarios    

1. Within expectations: -18.0 to -10.0: In such a case, the Euro is likely to rise within range, with a small chance of breaking higher.
2. Above expectations: -9.9 to -2.0: An unexpected higher reading can send EUR/USD well above one resistance line.
3. Well above expectations: Above -2.0: A reading close to the zero level would indicate improving confidence in the German economy. A second resistance line might be broken on such an outcome.
4. Below expectations: -18.1 to -23.0: A sharper decrease than forecast could send the pair below one support level.
5. Well below expectations: Below -23.0:  A reading deep in negative territory could rattle the markets, and EUR/USD could break two or more support levels.

For more on the Euro, see the EUR/USD forecast.