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The Euro Ahead of May GfK Consumer Climate Survey

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There have been arguments that the euro is set to get stronger in comparison to other currencies (especially the dollar and pound) in the medium term.

The key fundamental reason given for this is that Europe is exiting lockdowns sooner. In addition, the total package of government spending is smaller as a proportion of their economy.

On the other hand, detractors argue that tensions between the north and south have been exacerbated by the coronavirus outbreak, leading to potentially more political friction.

A key element in resolving this issue is how fast consumers return to the market. If people rush back to the shops from pent-up demand after a 2-3 month lockdown, we could expect a faster economic recovery.

This would likely benefit the euro in the near term. Europe was the first to suffer from the pandemic compared to other developed countries. Therefore, it should be the first to overcome it.

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Why this Data is Important

The GfK Consumer Climate Survey is the most up-to-date analysis of the consumer situation in Europe’s largest economy.

The survey was carried out in the first two weeks of the month. This coincided with when the German economy was moving to reopen. So, we can finally get some insight into how consumers are behaving now that social distancing measures are easing.

Generally, the Consumer Climate Survey doesn’t move the market so much, because it’s not tracked by the ECB. However, the pandemic has largely sidelined monetary policy at this point.

What matters now is how well we can expect the economy to recover going forward. Therefore, it wouldn’t be surprising if we got a stronger than usual reaction in euro pairs from the data.

What We Are Looking For

There is a distinct lack of consensus among analysts for what to expect from the data tomorrow.

The only agreement seems that there is going to be an improvement over last month’s measure. The range of forecasts among economists goes from -18.6 to -11.

Economists surveyed by Reuters seem to have a more depressing outlook than those surveyed by Bloomberg. Both of these surveys, however, are better than the GfK’s projections: -25.7.

For reference, last month was -23.4, the worst result by far on record. During the ’08-09 recession, consumer confidence didn’t even go negative.

We have to go back to 2003 when concern over a possible escalation of conflict in the Middle East had the measure dip into negative. However, even that was nowhere near as bad as last month’s reading.

The Market Reaction

Given the wide range of predictions among analysts, it’s hard to say the market has priced in expectations. Therefore we could see a stronger reaction in currency pairs.

A drop below last month’s figure is likely to elicit quite a negative response, beyond just currencies. This is because it would imply that consumers are less optimistic even as the economy is reopening. It would likely fuel further worries of another downturn in the economy.

To the upside, the majority of economists are projecting results below -15 (there were a couple of who project positive results, and that’s screwing the consensus upward).

Above that level is where we might see a stronger boost to risk-on sentiment in the markets.

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