Euro Reverses as ZEW Goes Negative For First Time in 5 Years

The EUR/USD reversed all of its gains from yesterday as the ZEW survey shocked to the downside printing at -5.6 versus 15.1 the month prior. The reading was substantially lower than the 11.4 market expectation and the first negative result in five years.

Hampered by high oil prices and the rising cost of capital due to continuous ECB rate hikes, German investors are also worried over the proposed 3% increase in Value Added Taxes scheduled to go into effect next January. The increase in the tax will take rates from 16% to 19% and some analysts believe that the current pick up in EZ spending is really a function of consumers front running the anticipated increases in goods and services.

If that is indeed the case, it would bode quite poorly for the region's economy as consumer demand will likely drop off markedly when new taxes go into effect. Given the recent recovery in the industrial sector and news yesterday from German Finance Ministry that tax revenues increased more than 11% on a year over year basis, some politicians in Germany have called for a delay in the implementation of new tax rates. The conservative government of Angela Merkel, however, has refused to consider this policy option at least for now.

Expect this issue to become a key concern of the FX market as we move closer to year end as it may impact EZ growth as well ECB monetary policy going forward.

Meanwhile, tonight's negative results from ZEW will now put the upcoming IFO survey due Thursday, under much closer scrutiny. Although ZEW readings have been trending down for the past seven months since January of this year, the IFO survey has consistently surprised to the upside boosting the euro in the process.

With the exception of a slight decline last month, IFO has risen steadily reaching record highs as recently as June. If the IFO readings begin to confirm ZEW's dour results the forthcoming ECB rate hikes, which at present the market essentially takes for granted will be put into doubt and euro may suffer further weakness especially on the crosses.