EUR/USD: Trading the German ZEW Aug 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 has been on a steady downward trend since April, dropping to a dismal -19.6 points  in July. The markets are predicting another weak reading, with an estimate of -19.2 points. This would indicate that institutitional investors and analysts are pessimistic about the German economy, which has released a string of disappointing ecomonic data.

Sentiments and levels

The slow pace of events in Europe continues to takes its toll on the euro, and things are deteriorating quickly, especially in Spain.  A Greek exit in 2012 is  a real possibility  (see how to trade the Grexit with EUR/USD), but  Greece will likely  meet its obligation of an August 20th bond repayment, which  is supportive for the euro. In the US, calls for QE from Eric Rosengren were countered by positive data, so the Fed is unlikely to step in just yet. So, the overall sentiment is neutral on EUR/USD towards this release.

Technical levels, from top to bottom: 1.2360, 1.2330, 1.2288, 1.22, 1.2144, and 1.2043.

5 Scenarios    

1. Within expectations: -23.0 to -15.0: In such a case, the Euro is likely to rise within range, with a small chance of breaking higher.
2. Above expectations: -14.9 to -11.0: An unexpected higher reading can send EUR/USD well above one resistance line.
3. Well above expectations: Above -11.0: This would indicate  more confidence  in the German economy. A second resistance line might be broken on such an outcome.
4. Below expectations: -23.1 to -27.0: A sharper decrease than forecast could send the pair below one support level.
5. Well below expectations: Below -27.0: Due to the  weakening German economy,  a sharp decline cannot be ruled out. In this scenario, the euro could break two or more support levels.

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