Tim Riddell, Research Analyst at Westpac, explains that ZEW’s expectations components tend to lead activity by one to two quarters and after the recent slump, the lack of any rebounds this month suggests that Eurozone’s Q2 activity data may fail to lift from the low Q1.
“The export side of next week’s trade data as well as Markit’s flash PMI will gain greater attention for any signs of activity rebounds, especially with inflation remaining so low (though rounding exacerbated core slipping to 0.7%). Could further weak data even raise the potential for ECB to extend its APP beyond this year?”
“Italian coalition negotiations are bringing forth the worst of market fears. Lega and 5 Star look set to confirm their alliance and the BTP-Bund spread is now expressing the market’s concerns over a low-tax, higher spending fiscal blowout from these still Euro-sceptic parties. The alliance may be fraught with potential divisions, but it will increase downside risks on EUR. USD strength remains and so EUR/USD still appears on course to test the 1.15 area.”