German GFK consumer confidence printed at 5.8 versus 5.7 the month prior continuing the trend of improving sentiment surveys in Eurozone’s largest economy. Although Germany saw a slowdown in economic activity in Q4 of last year, consumers are optimistic about a rebound. According to GFK, “consumers are expecting a gradual revival in the economy over the course of this year thanks to the present calm situation on the financial markets.”

Steady labor conditions have helped cushion consumer sentiment with the economic expectations component of the index rose to -11.3 points in January, after falling to -17.9 points one month earlier. Consumers’ willingness to buy in January rose to 35.3 points from 20.1 in December while income expectations also rose in January to 36 points from 21.2 in December – its highest level in six months.

The news from GFK suggests that Germany remains the engine of growth in the EZ and the improvement in consumer sentiment should help drive domestic demand in H1 of this year. The euro saw little reaction to the news, as earlier it sold off slightly on corrective flows from EUR/AUD sales, but has since steadied recapturing the 1.3450 level. The unit remains remarkably steady holding near the highs of the year on investor expectations of a rebound in economic activity in the the broader EZ.

With no other economic data on the calendar for the rest of the session, investor focus will shift to the Italian bond auction at 1000GMT. If Italy can see a marked improvement in its financing costs much like Spain, the further decline in periphery yields could help push the EURUSD to a retest of the recent highs of 1.3480 with the bulls trying to target the key 1.3500 level as the day proceeds.

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