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EU Economic Sentiment Continues to Improve

Posted: Wednesday, September 30th, 2020

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September 2020 business and consumers survey reveals continuing improvement of the EU economic sentiment. Although the EU Economic Sentiment Indicator (ESI) improved, it did so at a slower pace.

Confidence in the industry and services sectors catches up with pre-crisis levels. Also, consumer confidence reveals a pick-up in expectations, and even the employment expectations indicator shows steady improvements.

However, consumers’ intentions to make major purchases remain well below pre-crisis levels. Moreover, it appears inflation threatens to break below the zero level, dampening the ECB’s efforts to meet its inflation target.

EU Economic Sentiment

German, French, and Italian September CPI Miss Expectations

This week it is all about the Euro area inflation. So far, we have seen the German, French, and Italian September CPI data, and it disappointed in each country.

More precisely, two days from now the September Euro area HICP inflation holds the key for the ECB decisions for the rest of the year. Last month’s core inflation came at 0.4% – well below market expectations and the forecast and close to the zero level.

September regional data confirms the weak trend. Only based on data released this week, core inflation next Friday may slip to 0.2%. Or, even worse – below zero.

The ECB must and will act should the data confirm expectations. In fact, today’s ECB Watchers conference hosted by the central bank started with some dovish remarks from Christine Lagarde.

Dovish ECB Despite Improved EU Economic Sentiment

The ECB’s mandate focuses on inflation. Now that the Fed shifted its mandate to an Average Inflation Targeting (AIT) one, the tendency is that other central banks in the developed world will do the same.

No one says that the ECB will follow the Fed’s footsteps, but today’s Lagarde message pointed to some interesting drifts in the ECB policy. First, she suggested the unconventional measures used so far (e.g. TLTRO, QE) will become conventional. Second, she emphasized the importance the ECB gives to core inflation (hint to Friday’s data?). Third, the ECB looks at, including housing costs in the HICP calculation. Finally, and perhaps the most important point – the ECB may introduce a soft AIT.

Today is the last trading day of the month, and the EURUSD traded with a bid tone so far in the week. But despite improvements in the EU economic sentiment, the common currency suffers from dovish ECB rhetoric and a resurgence in COVID-19 infections.

Any economic improvements would fail to trigger EUR’s appreciation unless inflation moves away higher from the zero level. Until that happens, the ECB will use unconventional measures to stimulate the economic recovery.

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