This morning the Market Services Purchasing Managers Index data was once again better than expected, showing business confidence in the Eurozone is at a high. Over the second half of last year the Eurozone economy has performed well, which has helped the Euro strengthen.
Tomorrow the good data could continue with the latest Consumer Price Index data which is a key inflation indicator.
The European Central Bank (ECB) has previously shared warnings over inflation levels, but there is expected to be a movement back above 1%. Eurozone inflation has remained alarmingly low however there looks like some optimism is beginning to appear that things could start to improve. President of the European Central Bank, Mario Draghi had previously suggested that inflation would need to rise for the ECB to raise interest rates, with the end of 2018 the target. The Eurozone economy grew faster than the US last year with expected growth looking good for the 2018.
German political situation a cause for concern
Despite the Eurozone economy looking strong the German political situation is still vulnerable. In the election last year current leader Angela Merkel was unable to win a majority and her initial coalition talks didn’t go to plan. Next week the sides will return to the negotiating table and try to form a government for the next four years. Angela Merkel however is under pressure, a recent poll found that 46% of voters believe she shouldn’t be Chancellor. This is nearly half the voters which suggests that a change may not be far off in Germany.
This could cause considerable uncertainty for the Euro as Angela Merkel is the leader of the main EU economic powerhouse. If the talks breakdown and Germany return to the polls then we could see Euro weakness. Merkel has also believed in an integrated Europe and is a major supporter of the EU. Should there be a leader who doesn’t fully believe in the European Union then Euro investors could become concerned.