The euro has posted slight losses in the Tuesday session. Currently, EUR/USD is trading at 1.1762, down 0.28% on the day. On the release front, German ZEW Economic Sentiment came in at 17.6 points, well short of the forecast of 20.1 points. Eurozone Final CPI remained unchanged at 1.5%, matching the forecast. On Wednesday, ECB President Mario Draghi will address an ECB conference in Frankfurt, and the US releases Building Permits and Housing Starts.
With the German economy booming, the markets expected a surge in investor confidence in the ZEW Economic Sentiment report. That did not happen, as the indicator improved slightly to 17.6, but was well below expectations. The Eurozone ZEW Economic Sentiment softened to 26.7, well below the forecast of 34.2, and weaker than the previous reading of 31.7 points. Investors will likely focus on the German release, which marked a 4-month high, even though it missed expectations. On the inflation front, there were no surprises, as eurozone inflation remained stable at 1.5 percent. Inflation has moved significantly higher in 2017, but still remains shy of the ECB’s target of just below 2 percent. ECB President Mario Draghi has reiterated that the ECB will not raise interest rates in the near future, and the markets will be listening closely as he addresses an ECB conference on Wednesday.
The Spanish government has demanded that the Catalan leader, Carles Puigdemont, explicitly state whether he has declared independence. Madrid has extended a deadline for a reply until Thursday, and warned that if a clear answer was not forthcoming, it could trigger Article 155 of the Spanish constitution, which would allow the central government to disband the Catalan parliament and call elections or even set up a puppet government. Puigdemont continues to play a dangerous game of cat-and-mouse, and has refused to clarify if he proclaimed independence. Instead, Puigdemont sent a two page letter to Spanish Prime Minister Mariano Rajoy, urging dialogue between the two leaders. However, Rajoy has insisted there will be no talks about independence, saying that the independence referendum, in which voters overwhelmingly voted in favor of independence, was illegal. The deepening crisis has led hundreds of companies to start leaving Catalonia, and the Standard and Poor’s rating agency has said that the region could face a recession if the situation is not resolved. Earlier this month, Spain’s economy minister said the uncertainty caused by the crisis had led to a freeze in investment projects in Catalonia. So far, the situation has not affected the euro or European stock markets, but that could change if the crisis takes a toll on the Spanish economy, the fourth largest in the eurozone.
