EUR/USD: Trading the Euro-Zone Economic Confidence Report

Confidence in the Euro-Zone fell to a record-low of 64.6 from a revised reading of 65.3 in February amid expectations for a rise to 65.4, and deteriorating fundamentals are likely to reinforce fears of a deepening recession as OECD forecasts the economy to contract 4.1% and anticipates the unemployment rate to reach 10% this year. As households and business face the worst economic downturn in over half a century, policymakers have taken unprecedented steps to stimulate the ailing economy, and the European Central Bank is expected to lower borrowing costs further in the month ahead as the outlook for growth and inflation falter. Nevertheless, as ECB President Trichet remains reluctant to overshoot the overnight lending rate, market participants speculate that the central bank will utilize tools beyond the interest to manage monetary policy as they maintain at 2% target for price growth.

Economic sentiment in the Euro-Zone unexpectedly slipped to 65.4 from a revised reading of 67.2 in January, which is the lowest reading since recordkeeping began in 1985, and the data reinforces a dour outlook for the region as growth prospects deteriorate at a record pace. Weakening fundamentals paired with increased turmoil in the banking sector continues to weigh on households and business, and as the outlook for growth and inflation falter, fears of a deepening recession could lead the European Central Bank to step up their efforts as the region is expected to face its worst economic downturn since World War II. As a result, market participants anticipate the ECB to lower borrowing costs by another 50bp in March as households and businesses turn increasingly pessimistic towards the economy, and may adopt unconventional tools to stimulate the ailing economy as the interest rate falls close to zero.