Euro Area Confidence Slumps On Renewed Debt Woes, Weak Growth

Euro area confidence slumped sharply in April alongside a severe drop in German investors' outlook for the economy as Cyprus renewed debt crisis tension, confirming the recovery is still not stable.

ZEW reported a sharp drop in Economic Sentiment in the euro area to 24.9 in April from 33.4; German Economic Sentiment slumped to 36.3 from 48.5. The Current Situation dropped to 9.2 from 13.6 both missing forecasts.

Investors' confidence dropped in Germany and the Euro Area as the recovery outlook remains uncertain with weak signals from across the euro area and major economies from China to the United States.

ECB's Draghi this month said the recovery outlook for the second half also faces downside pressures, adding to uncertainty over the growth outlook.

The ECB remains committed to reviving growth and the euro, according to Draghi. The ECB has yet to take a decision on lowering rates even as inflation holds below 2.0% target at 1.7% in March.

Renewed crisis in Cyprus tipped the fears once again, with the bailout that tapped into depositors accounts agonizing investors further, especially shall the model become a forma for bailouts in the region! The political tension in Italy was added agony that impacted markets negatively and weighed negatively on the sentiment in the past period.

The recovery outlook remains uncertain and recent data suggests again weakening recovery signals opposed to signs of stability seen in the early months of the year, signaling the recession in the euro area extended into the second quarter of the year.

Germany remains the anchor for the euro and even with expectations the economy skirted contraction in the first quarter, the data from the second three months of the year are not overwhelming. Investors fear a relapse in recovery in the biggest economy that will keep the euro area sinking deeper in its agony.

The Bundesbank however is not as pessimistic over the outlook for German growth and did not revise lower the growth outlook for Germany.

The euro continues to trade with high volatility and will add to the uncertainty over the outlook. The recent weakness toward 1.27 areas from early year peaks at 1.37 areas is certainly supportive to trade and exports to help revive the recovery amid sluggish recovery domestically and weak consumer spending with the sever austerity across the euro area major economies.

The EURUSD maintains stability above 1.2970 which withholds the upside bias for now to resume the upside correction. The gains for the euro in the current period are not expected to be lasting as the range for the euro trading has shifted lower with the weak growth outlook for the area and persistent debt woes, especially with Slovenia now at risk.

Holding above the aforementioned areas will offer upside support for the EURUSD to retest 1.31 areas and stability above 1.3115 will extend gains to ward 1.32 areas once again.

Even with the upside eyes for the euro the gains will still be limited and shorting rallies remains favored as the euro adjusts now to lower trading range which is likely to remain in the coming period between 1.32-1.26 areas until we have significant signals to alter the outlook.

IMOH, Clement I.
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