The ZEW survey surprised to the downside with the economic sentiment index in Germany plunged -7.5 points to 10 in August. The reading for the Eurozone as a whole fell -6.3 points to 29.3. Both readings came in weaker than expectations. The current situation index for Germany, however, climbed +0.3 point higher to 86.7, compared with consensus of 85.5. The euro fell against US dollar after the report on profit-taking. Indeed, EURUSD has been in consolidative mode since the beginning of August, following a 5% rally in July. We believe the pair would remain range-bound ahead of the Jackson Hole Symposium beginning on Thursday.
Jackson Hole Preview
Speeches by ECB President Mario Draghi and Fed Chair Janet Yellen are the key focuses. The market is anticipating Draghi to give more hints on ECB’s asset purchases tapering. However, an ECB spokesman indicated last week that Draghi would not deliver a new policy message, but focus on the symposium’s theme of "Fostering a Dynamic Global Economy". We believe Draghi would refrain from sending more signals about the policy outlook this week as the ECB is still working on the new economic projections for the September meeting. It would be prudent to wait for the updated economic forecasts and make announcement thereafter.
More Cautious over Currency Strength
We acknowledge that Draghi has turned more cautious in his communications, after his speech in late-June had accelerated euro’s rally. The President noted in the Sintra forum (Speech: https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170627.en.html) on June 27 that he is confident that "monetary policy is effective and the transmission process will work". Moreover, "all the signs now point to a strengthening and broadening recovery in the Euro area. Deflationary forces have been replaced by reflationary ones". EURUSD jumped +1.41% on the day, marking the biggest one-day rally for 2017. Euro’s strength was then supported by encouraging macroeconomic data and June’s ECB minutes released on July 6. The June minutes revealed that the members had considered "revisiting the easing bias with respect to the APP purchases, whereby the Governing Council signaled its readiness to increase the pace and/or duration of the asset purchases if necessary". They eventually decided to remain cautious and prudent, and maintain the original language.
Draghi apparently turned more dovish at the July meeting, attempting to tame euro’s strength. He emphasized that the members had not discussed tapering and reiterated that the ECB is ready to increase the pace and/or duration of the asset purchases if necessary. Yet, EURUSD soared to almost a 2-year high after Draghi noted at the press conference that the adjustment of asset purchases might be discussed in autumn. The members expressed concerned about euro’s appreciation, as suggested in the July minutes. They worried about "a possible overshooting in the repricing by financial markets, notably the foreign exchange markets, in the future". They emphasized that "the still favourable financing conditions could not be taken for granted and relied to a considerable extent on a continued high degree of monetary policy support". The ECB does not prefer the euro to appreciate excessively as this might affect its tapering plan.
Therefore, we believe Draghi would be cautious and refrain from sending any signal that might be interoperated as "hawkish" at the Jackson Hole Symposium. Yet, he might touch upon currency strength and its relations with inflation expectations, given that the final reading of Eurozone’s CPI contracted -0.5% m/m in July, revised from the preliminary reading of 0%.