Euro recovers on strong investor sentiment index

The euro is in positive territory on Tuesday and has recovered the losses seen on Monday. In the North American session, EUR/USD is trading at 1.2171, up 0.35%.

Germany investor sentiment sparkles

The euro received a boost on Tuesday, after an excellent performance by the German ZEW Economic Sentiment Index. The gauge of investor sentiment jumped to 84.4 in the May survey, up from 70.7 beforehand. Notably, this is the highest level since 2000, and the sharp gain shows that the assessment of the economic situation in Germany has improved significantly. Investors are showing increased optimism, as Germany’s economy is reopening after a bruising battle with the Covid pandemic.

Germany is the bellwether for the eurozone, and the Eurozone ZEW Economic Sentiment Index showed also showed sharp acceleration, with a read of 84.0, up from 66.3 points. With the easing of health restrictions in France, Italy and Spain, the recovery is gaining traction and this should translate into stronger demand for euros.

The German ZEW report also found that financial experts expect inflation levels to rise in the next six months. If inflation in Germany and the eurozone moves higher, this will put pressure on the ECB to consider a taper of its massive QE programme. We have already seen some major central banks make changes in policy as a result of improving economic conditions. The Bank of Canada tapered QE at its most recent policy meeting, and the BoE announced last week that it would reduce its weekly bond purchases, although it insisted that this was not a tightening of monetary policy.

On the inflation front, Germany releases CPI for April (6:00 GMT). The initial estimate came in at 0.7%, up from 0.5% beforehand. The second-estimate read is expected to confirm the initial estimate.

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EUR/USD Technical

• EUR/USD faces resistance at 1.2227 and 1.2292
• On the downside, there is support at 1.2042 and 1.1922

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-event

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