The ZEW Indicator of Economic Sentiment, a monthly survey of analysts and institutional investors run by the Mannheim research institute of the same name, rose to 34.2 points in August from 26.3 in July. Economists had expected 30.0. It is the fourth consecutive monthly gain and the strongest reading since February. The companion gauge of current conditions, which asks the same 185 respondents how the economy feels today rather than in six months, climbed to minus 61.1 from minus 77.6. That is a jump of 16.5 points and comfortably ahead of forecasts near minus 69.
ZEW put the improvement down to solid quarterly results from German companies and a recent run of strong exports, supported by federal infrastructure spending. The sector detail is where the recovery shows. Expectations for the vehicle industry leapt 22.2 points, chemicals, pharmaceuticals and mechanical engineering all firmed, and the reading for private consumption improved from minus 15.2 to minus 6.2. One risk sits outside the corporate accounts. Record low water on the Rhine is limiting barge loads for chemical producers, steelmakers and utilities, and ZEW flagged it as an acute threat to activity in the coming weeks. The eurozone version of the survey told the same story, rising to 31.4 from 23.4 against a forecast of 25.0.
That matters for the European Central Bank. It left its deposit rate, the rate it pays banks on reserves and its main lever on borrowing costs, at 2.25% in July, after a surprise quarter point rise in June taken in response to energy costs pushing inflation above target. The bank's own projection has inflation averaging 3.0% this year. A survey showing confidence building through the summer removes the growth objection to tightening again, even in an economy that grew just 0.2% in the second quarter. Markets have all but fully priced a move to 2.50% on 10 September. Confidence is running well ahead of conditions, and the distance between plus 34.2 and minus 61.1 is the whole German story in two numbers.
What it means for GBP/EUR
Sterling gave ground. GBP/EUR traded around 1.1690 after the release, down from the 1.1721 it reached last Wednesday and back toward the lower half of an August range that has held between roughly 1.1650 and 1.1720. The pound still carries a wide rate advantage, with Bank Rate at 3.75% against the ECB's 2.25%, worth 150 basis points. That gap narrows to 125 if the ECB moves next month and the Bank of England holds on 17 September, which is what markets currently expect. For a business paying euro suppliers through the autumn, a forward contract fixes today's rate for a payment due on a future date, and the case for using one is stronger before two central banks meet than after.
