Economic releases out of Europe this week are unlikely to offer much new insight into the Eurozone economy but will nevertheless be watched closely as the European Central Bank’s March policy meeting nears. The European Commission’s economic sentiment gauge is up first on Wednesday at 10:00 GMT, with the flash inflation print following on Friday, also at 10:00 GMT. The euro, which has been largely moving sideways since November, will probably struggle to break out of this range.
The economic sentiment index had fallen to a more than two-year low of 106.2 in January, reflecting the fast-deteriorating economic environment in the euro area. While a turnaround is not being predicted just yet in February, there have been some signs that the deceleration in the growth momentum may be bottoming out. The economic sentiment indicator is forecast to drop by 0.2 points to 106.0 in February.
The flash February PMIs released last week also pointed to a steadying picture, in the services sector at least, although many would argue it’s too soon to price out the risk of a recession just yet.
The ECB, which next meets on March 7, might have something positive to talk about, though, if Eurozone inflation turns higher in February as expected. The flash reading of the harmonised consumer price index (HICP) is projected to rise from 1.4% to 1.5% year-on-year in February.
However, rather frustratingly for the central bank, there’s not likely to be much progress with underlying inflation. The two core measures, HICP excluding food and energy and HICP excluding food, energy, alcohol and tobacco, are both forecast to come in at 1.1% y/y. Underlying inflation has been stubbornly stuck around 1% since 2015, persistently falling short of the ECB’s target of close to but below 2%.
The ECB is widely anticipated to discuss at their next meeting whether to launch a new round of cheap long-term loans for Eurozone banks in order to stimulate lending in the region. The extent and depth of the Eurozone slowdown has taken policymakers by surprise, who last year ended their bond buying program on the expectations that growth would quickly bounce back. The ECB is also seen as tiptoeing towards pushing back its timeline of beginning to raise interest rates after the summer.
A stronger-than-forecast set of figures next week are unlikely to alter expectations about a new cheap finance scheme by the ECB but may provide the euro with some support, especially as the US dollar comes under pressure from the receding trade tensions.
Euro/dollar could break above immediate resistance at the 50% Fibonacci retracement of the downleg from 1.1515 to 1.1231 at 1.1373 if the data surprise to the upside. This could be a difficult barrier to overcome as the 200-period moving average (MA) is also close to this level in the 4-hour chart, making the 1.1370-1.1375 region a potentially critical resistance zone. Clearing this area would open the way for the 61.8% Fibonacci at 1.1407.
However, any weakness in either the economic sentiment or inflation numbers could erase the euro’s soft bullish bias in the near term. Euro/dollar could slip below immediate support around the 38.2% Fibonacci at 1.1340. This would bring the 50-period MA into range, presently at 1.1325, while deeper losses could see the 1.13 handle being tested as it’s near the 23.6% Fibonacci at 1.1298.
