Eurozone Economic Sentiment Indicator Falls
Expectations that the ECB will have to announce fresh easing measures have increased again this week. This comes as another batch of data out of the eurozone undershot expectations.
The eurozone economic sentiment indicator fell from 103.3 in June to 102.7 in July, raising serious concerns about growth over the remaining half of the year.
The decline was widespread across all sectors. This is particularly concerning as, up to now, services had been able to defy the move lower in manufacturing. The decline in the services sector was mainly as a result of a drop in expectations of future demand, which highlights the bleak outlook for the eurozone.
The manufacturing picture is worse still! Order books continue to weaken, leading to pessimistic business conditions. This has the knock-on effect of reducing employment expectations. The biggest red flags have been the severe declines in production in Germany. And these come on the back of particularly poor German PMIs last week.
Weak German Inflation
The latest inflation figures out of Germany will also be worrying for the central bank. Headline inflation printed just 1.1% in Germany over July, down from 1.5% in June.
The decline was driven mainly by a price fall in heating oil which has started to move lower compared to last year. Indeed, as the negative impact of weaker oil and slower global growth looks set to continue, inflation is likely to remain stagnant in the coming months. This, in turn, keeps the pressure on the ECB to act.
At its last meeting, the ECB took markets by surprise by refraining from easing. However, the ECB gave a clear signal that it will most likely need to cut rates in the coming months. The bank added that its staff was also discussing alternative measures to fuel growth.
Key Comments From Draghi
Speaking during the post-meeting press conference, Draghi told reporters:
“[The] last projections were in a sense suggesting that we might have had a rebound in the second part of the year. Now incoming signs show weaknesses – weakness of growth in the second, in the third quarter as well, so this rebound becomes less likely now…The balance of risks was assessed to be on the downside… the simple prolonged and lingering of this uncertainty is by itself a materialization of one of these risks.”
Draghi went on to say:
“This [economic] outlook is getting worse and worse and it is getting worse and worse in manufacturing and getting worse and worse in countries where manufacturing is very important.”
Commenting further on growth, Draghi said:
“The risks surrounding the euro area growth outlook remain tilted to the downside, reflecting the prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism, and vulnerabilities in emerging markets.”
Finally, on stimulus, Draghi said:
“A significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favorable and support the euro area expansion, the ongoing buildup of domestic price pressures, and, thus, headline inflation developments over the medium term.”
For now, EURUSD is fighting to stay above the 1.1130 level support. After a failed break of the bearish trend line from year to date highs, EURUSD traded back down to the level, which is currently holding, presenting a potential triple bottom. However, bulls will need to see price back above 1.3250 to get price out of the danger zone. For now, focus remains on further downside with 1.1027 the next downside level to watch.