Eurozone sentiment indicator reveals easing inflationary pressures in June
Lead — The recent Eurozone Economic Sentiment Indicator points to easing inflationary pressures, raising questions about the European Central Bank's (ECB) tightening trajectory. According to the full note from ing-think, sentiment improved to 95 in June from 93.7, although it remains notably lower than pre-conflict levels. The decline in employment expectations alongside diminishing core inflation pressures suggests the ECB may need to evaluate its rate hike strategy as energy prices stabilize and economic growth teeters on the edge of stagnation.
What the desk is arguing
The desk assesses that easing inflationary pressures in the Eurozone significantly impact the ECB's monetary policy direction. Per the full note from ing-think, the Economic Sentiment Indicator's rise indicates cautious optimism but highlights an underlying fragility as employment outlooks weaken. With inflation expectations softening, the window for further rate hikes could be closing.
Supporting this is the rapid decline in oil prices, which the report suggests has begun to ease core inflation pressures. The ECB faces a pivotal question: whether confidence in the recent US-Iran deal can translate into sustained economic improvement or whether the current conditions justify a pause in their hiking cycle.
The alternative read would involve a more robust employment scenario that could support continued growth and justify further ECB rate adjustments. However, failing economic indicators challenge this outlook.
Where it sits in our coverage
Our consensus target for the EUR/USD pair is currently 1.075, with a range from 1.04 to 1.12. Specific firms contributing to this consensus include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns closely with the jpmorgan target, suggesting a stronger Euro as the ECB potentially shifts gears on rate hikes. In contrast, bofa projects a downward bias that reflects a more cautious approach.
How other firms see it
Firms aligned with the desk's view include jpmorgan, which anticipates a bullish EUR/USD scenario, while those contrary to this stance include bofa, predicting lower targets amidst concerns regarding growth.
Looking ahead, the EUR/USD trajectory is likely intertwined with broader ECB policy developments and global oil prices. Investors may want to monitor euro area indicators that could further illuminate the impact of ECB policies on currency movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Eurozone sentiment indicator rises, indicating improved but cautious confidence among businesses as of June 2023.
- 02Inflationary pressures are subsiding, with significant questions around the ECB's rate-hike strategy amidst a weak employment outlook.
- 03The ECB may need to consider pausing further increases as core inflation pressures ease alongside lower oil prices.
- 04Economic sentiment remains below pre-Middle East conflict levels, emphasizing a fragile recovery.
Market implications
Traders should watch levels around 1.075 for EUR/USD as a key pivot point, especially in light of any new Eurozone economic data releases. Given the evolving sentiment on inflation and employment, any shifts here could lead to significant positioning adjustments ahead of the ECB's next policy meeting.
Risks to this view
The primary risk to the desk's call would be a detrimental effect stemming from a collapse of the recent US-Iran deal, which could reignite inflationary pressures or introduce energy supply shocks. A significantly positive employment report could also force the ECB's hand towards another rate hike, invalidating the current call for a pause.
Articles Eurozone sentiment indicator reveals easing inflationary pressures in June 10:28 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Economic sentiment improved in June but remains well below pre-Middle East war levels, and employment expectations have weakened. With inflation pressures subsiding, the question of whether the ECB needs to continue to hike becomes more pressing Bert Colijn Europe’s worries have promptly shifted from fuel shortages to blistering heat Europe’s worries have promptly shifted from fuel shortages to blistering heat . While also not great for the economy, it is surely preferable to another energy shock.
And sentiment among businesses and consumers is cautiously improving. The increase in the Economic Sentiment Indicator from 93.7 to 95 marks the second cautious increase in a row, with most of the sampling done before the US-Iran deal was reached. If the deal holds, we can expect further improvements.
When looking at the survey results for output in June, it disappoints for both industry and services. The eurozone is clearly rounding out a poor quarter with stagnation a real possibility. But expectations for the months ahead are on the rise.
Concerningly, though, the employment outlook is weakening, which could prove to be a continued drag on the service sector. Most crucially in this time of revived inflation worries, expectations for selling prices of both industry and services fell fast in June. This indicates that pressures on core inflation were already easing ahead of the deal and the subsequent sharp decline in oil prices.
For the ECB, the question is how much faith it has in the fragile US-Iran deal. Because at face value, the time to hike already seems to have passed. Oil prices have rapidly come down, the economy remains slow and while businesses are still going to pass through higher costs to consumers, the pace with which they plan to do so already seems to be fading.
But if the deal doesn’t hold and problems resurface, inflationary pressures could swiftly return. Some more time to see how this plays out before the next move on rates is therefore not a bad thing. July may be a great time to pause for the ECB, like it is for the rest of Europe.
Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Bert Colijn Chief Economist, Netherlands Bert Colijn is ING's Chief Economist of The Netherlands.
He joined the firm in July 2015 and covers the global economy with a specific focus on the eurozone. Prior to this, he worked at The…
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