Consumer Confidence and Economic Sentiment Slide Further, ECB Face Tough Balancing Act

• EZ Consumer Confidence (Final) -28.8 vs -25 Previous.
• EZ Economic Sentiment 93.7 Actual vs 97.3 Revised Forecast.
• ECB Face a Challenge Balancing Recession Risks and Potential Rate Hikes.

EURO Fundamental Outlook

The final consumer confidence numbers from the Eurozone fell by 3.8 points to -28.8 in September of 2022, the lowest reading since the series began in 1985 and in line with preliminary estimates. Majority of components including householders’ assessments of their past financial situation, the outlook on their future financial situation, intentions to make major purchases and their expectations about the general economic situation contributed to the steep decline. A slight uptick in industrial sentiment may well be short lived given the energy concerns moving forward.

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The outlook for the remainder of the year from the eurozone remains bleak. This has been compounded by the geopolitical tension around apparent Nord Stream sabotage, which has escalated with the eurozone now in discussion for its eighth package of sanctions. Controls around Russian gas however remain a contentious issue in the bloc, with the commission telling governments they need a combination of tools rather than market intervention alone. This added tension is something the eurozone would have preferred to avoid as it prepares for an uncertain winter.

Source: Bloomberg Economics

The euro has been under increasing pressure recently struggling to get back toward parity. The weaker sentiment numbers will only make the European Central Banks job that much harder as it looks to keep inflation in check. This week’s rhetoric from ECB members has been hawkish to say the least with more speakers later in the day. ECB President Christine Lagarde who was seen as neutral stated they will raise rates at the next ‘several meetings’ which puts her firmly in the hawkish camp now. The bigger surprise came from ECB policymakers Rehn and Centeno (doesn’t have voting rights in October) who were considered neutral and dovish respectively. Both came out in support of frontloading hikes which pushes them closer to the hawkish camp. The question as policymaker Rehn mentioned is the balance between inflation and recessionary risks which will be amplified by declining consumer confidence and economic sentiment.

Market reaction

EUR/USD 1H Chart

Source: TradingView, prepared by Zain Vawda

EURUSD saw a 15 pip spike higher in the immediate aftermath of the news, surprising considering both economic sentiment and consumer confidence declined.

On the 1H we are trading within the 20, 50 and 100-SMA with the 20-SMA crossing over to the 50 and 100-SMA to the upside. This usually signifies bullish momentum with the resistance area around 0.9850 looking appealing.

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda