The European Commission will publish its economic sentiment indicator (ESI) on Thursday at 09:00 GMT, which comes hot on the heels of last week’s much better-than-expected Eurozone services PMI from IHS Markit. The flash PMI readings for June raised hopes that the Eurozone soft patch is coming to an end, boosting the euro. However, consensus forecasts for the ESI are for another drop in the indicator in June.
Sentiment across the euro area hit the highest since 2000 in December, with the index rising to 115.2, as the growth momentum peaked. However, following the slowdown since the start of 2018, the gauge has retreated to 112.5. Expectations are for the ESI to continue to trend lower in June, falling to 112.0. While the pullback in the economic sentiment index hasn’t been as large as the more closely-watched manufacturing and services PMIs, it’s reinforced the view that business morale has been dampened notably since the beginning of the year.
Looking at the ESI’s sub-indices, the weakening sentiment over the past few months is visible across all sectors. The industry, services, consumer, retail trade and construction sectors which make up the ESI have all come off their highs achieved in December/January. European consumers have also been feeling less optimistic. The European Commission’s consumer confidence indicator fell back into negative territory in June, declining to -0.5 in the flash reading and retracting from the 17½-year high of 1.4 reached in January. It is expected to remain unrevised in Thursday’s final print.
Having regained a positive footing after the unexpected jump in the services PMI on Friday, the euro could extend it gains versus the US dollar if the economic sentiment survey provides further evidence that business conditions are improving in the Eurozone. The single currency is currently facing immediate resistance at the 23.6% Fibonacci retracement of the April-June downslide, around $1.1720. A better-than-expected set of figures on Thursday could lift the euro above this barrier, bringing the $1.18 handle within reach.
However, a disappointing survey would cast doubt about a pick up in Eurozone growth and could cut short the euro’s upside correction. Euro/dollar could re-test the $1.16 level on fresh selling pressure, with a break below it opening the way to May’s 10-month low of $1.1506.
