EUR/USD: the ZEW index is firm, but stagnating

The euro weakened slightly against the dollar, without any change to its underlying bias, following the release of the ZEW index of confidence in the German economy. This solid score corroborates recent encouraging macroeconomic data indicating that the eurozone's largest economy is emerging from its economic slump. Nevertheless, at 58.2, it represents a slight decline compared to the previous month, and, more importantly, it fell short of expectations by 7.4 points.

"The ZEW indicator remains stable. The German economy has entered a phase of recovery, albeit a fragile one. Considerable structural challenges persist, particularly for industry and private investment. The impending reforms to the social security system should significantly enhance Germany's attractiveness as a business destination," comments Professor Achim Wambach, PhD, Chairman of the ZEW, regarding the results of the current survey.

The very positive surprise of last week's Sentix investor confidence index for the Eurozone, which exceeded expectations, is largely due to the German component.

Swiss Life AM economists provide context: "The outlook will largely depend on fiscal expansion, although its implementation, speed, and effectiveness remain uncertain. Spending from the special budget increased significantly in 2025 and is expected to continue rising in 2026. Furthermore, the differences between actual and projected spending reflect a mixed picture."

"In transport infrastructure, existing resources were quickly committed because projects were already in place and maintenance was a priority. But in more complex sectors (energy infrastructure, research, and digitalization), commitments were significantly lower than anticipated, indicating higher requirements in terms of design, permits, and coordination. The budgetary impetus for these structurally important investments therefore largely depends on their execution. The key here is not the deficit trajectory, but efficient and coordinated execution to quickly fill order books and kickstart production."

In the US, trading resumed on Wall Street this Tuesday, after a holiday Monday (President's Day). Currency traders are digesting the rather solid content of the latest federal employment report, which coincides with a marked slowdown in inflation.

Regarding non-farm payrolls (NFP), average hourly wages rose 0.4% (0.3% consensus forecast), and the unemployment rate fell to 4.2% of the labor force, compared to expectations of stability at 4.3%. Finally, private sector job creation reached 129,000, double the median analyst forecast.

"Investors have postponed the first anticipated rate cut in Fed Funds futures from June to July, as today's data suggests a reduced need for further monetary easing to support employment," explains Jeff Schulze, head of economic and market strategy at ClearBridge Investments (a subsidiary of Franklin Templeton).

"The January jobs report shows a strong rebound in the labor market, which has regained its balance after the weaknesses observed in the second half of last year. The data is solid across all indicators, with a further decline in the unemployment rate to 4.2% and the strongest increase in private sector job creation since the end of 2024."

Released on Friday, the Consumer Price Index (CPI) slowed to 2.3% year-on-year for January, compared to 2.6% in December.

"A moderate inflation report for January supported risk assets [Friday] morning. However, persistent underlying price pressures should temper optimism regarding a third rate cut this year, now priced at around 50% in the Fed funds futures markets (2.5 cumulative cuts anticipated in 2026)," comments Josh Jamner, Senior Investment Strategy Analyst at ClearBridge Investments.

It should be noted that CPIs are just one indicator among many for the Fed. Personal Consumption Expenditures (PCEs) are the preferred measure of the US central bank in its assessment of inflation. And inflation remains above the Fed's targets.

"Inflation remains a key concern for the Fed, particularly given the potential impact of tariffs, and remains above the central bank's target. In this context, it is expected to keep its key interest rates unchanged at its upcoming meetings. A possible easing..."