As the euro races past the $1.24 level again, recent data out of the Eurozone does not appear to support this renewed bullishness for the single currency. Business confidence gauges for the region are all pointing to a softening in economic activity during the first quarter of 2018, with the March data, in particular, showing a notable slowdown. The European Commission’s economic sentiment index due on Tuesday will be the last of the major surveys for March and will likely join the others in dipping downwards.
The economic sentiment index is expected to decline from 114.1 in February to 113.4 in March, which would make it a six-month low. It’s sub-components, the business climate, industrial sentiment and services sentiment indices are also forecast for a fall in March. Only the consumer confidence measure is not expected to decline and instead to remain unchanged at February’s level.
However, with Europe’s recovery in a large part being driven by rising exports, growing trade tensions have already started to dampen business morale across the bloc, especially in Germany. Should the tensions escalate into a full-blown trade war with the United States as well as with China (note that like the US, the European Union is also unhappy about China dumping cheap steel into European markets), the Eurozone recovery could become at risk. Another reason for the slowdown could be the stronger euro. IHS Markit reported a sharp drop in Eurozone export orders in its report for the March flash composite PMI.
On the positive side, with the German coalition deal now in place, the timing is ripe for Chancellor Angela Merkel and France’s Emmanuel Macron to press ahead with Eurozone reforms. And with Brexit talks now making progress as well, investor optimism for the region is unlikely to deteriorate dramatically even if trade war risks were to materialize.