Eurozone Growth Concerns Intensify Amid Hawkish Sintra Remarks

EUR: Hawkish comments in Sintra expected

Evidence of a deteriorating economic outlook in the eurozone appears to be mounting. Yesterday’s IFO survey in Germany came in on the weak side, with the Business Climate index falling more than expected from 91.5 to 88.5 and the expectations gauge from 88.3 to 83.6. The Current Assessment indicator matched expectations, but still declined in June from 94.8 to 93.5.

When adding other forward-looking business surveys (PMIs, ZEW) the case for a negative re-rating of the eurozone growth outlook is clearly strengthening. The euro’s null reaction to yesterday’s IFO was likely due to the rather pronounced post-PMI drop on Friday: in a way, the IFO merely confirmed what PMIs had already flagged last week.

Most importantly, the ECB has appeared primarily focused on inflation concerns as opposed to the growth discussion. Sintra was the stage for pivots in the monetary policy message in past editions, but this year, the message may be a reiteration of the hawkish tone we heard after the latest policy meeting: a hike in July is necessary, one in September is up for debate. President Christine Lagarde delivers her introductory speech this morning, and then we’ll hear from Panetta (a dove) and Schnabel (a hawk). Ultimately, EUR/USD may not be trading far from 1.0900 at the end of the Sintra summit.

We’ll also be paying attention to Norges Bank Governor Ida Wolden Bache’s speech today in Sintra. NOK has faced huge volatility after the larger-than-expected 50bp hike by Norges Bank last Thursday, with the initial rally proving very short-lived and the krone plunging on Friday. EUR/NOK is now back below 11.70, but we may still hear some attempts to propel the currency higher from the governor.