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ZEW Economic Sentiment Index & Its Implications


What is the ZEW Economic Sentiment Index?

ZEW (The acronym stands for Zentrum fur Europaische Wirtschaftsforschung) Economic Sentiment is a survey that is essentially conducted by economists and analysts on a monthly basis where they asses the economic conditions of several countries and regions including the US, Germany, Japan, and United Kingdom. The Index marks a positive outlook if greater than 0 and a negative outlook if lesser than 0. Here, more than 300 experts from banks, general insurance companies, finance officers of selected corporations are asked about their assessment and forecast for the financial market and overall economic outlook. Participants usually give a six-month expectation of how they see the economy, inflation rates, interest rates, stock market and exchange rates in the Eurozone, Germany, Japan, United States, United Kingdom, and Italy and they also include the expectation concerning oil.  This indicator is created and published from the results obtained from the ZEW Financial Market Survey. The ZEW Indicator of Economic Sentiment is a leading Indicator for the German economy and neighbouring countries.

The ZEW was founded by the German Government in 1990 in association with Mannheim University. The research is carried out in microeconomic and macroeconomic fields as well, including financial management, labour, human resources, public policy, industrial economics, corporate taxation, public finance, and environmental economics. These are the broad areas that ZEW covers extensively. The Scientific Advisory Council of the ZEW uses the information collected through the survey to make-up a six-month forecast for the German economy.

What does the ZEW Economic Sentiment Index of the country measure?

All the survey that is done is taken to the financial market experts where they are asked to assess the probability of performance of diverse economic sectors ranging from banks, trade, construction, vehicle industry, chemical, steel, electronics, mechanical engineering, utilities, services, telecommunications, and information technology. Every expert comes out with his own prediction on a particular category which reflects different assumptions and can be put in percentage form. It is evaluated as the difference between the percentage of analysts who are optimistic about the percentage of people who are pessimistic. For example, if 30 per cent of the participants expect the economic situation to improve in next month’s in Germany, 30 per cent believe that the situation will be unchanged, and 40% expect the economic situation to deteriorate then ZEW Economic Sentiment will take the value of -10. The balance of these percentages is computed by taking the difference between positive and negative forecasts for each sector variable. Application of mathematically calculated results to expected changes in the economic situation in Germany is what is measured by the ‘ZEW Economic Sentiment Index.’ Thus, a positive number means that economists are optimistic about the country and vice versa.

A reliable source of information on ‘ZEW Economic Sentiment Index’

The Financial Market Report, which is only available in German, provides a detailed analysis of the information and publishes the result in its official website and magazine. In addition, they are also published at regular intervals in the form of indicators and forecasts. The Information Service Routers also publishes the aggregate survey results. It majorly deals with European countries and specific data related to Germany. Here is a list of countries within the Eurozone and its ZEW Index rate:

EURO (FRANCE) – https://tradingeconomics.com/france/zew-economic-sentiment-index

EURO (GERMANY) – https://tradingeconomics.com/germany/zew-economic-sentiment-index

EURO (ITALY) – https://tradingeconomics.com/italy/zew-economic-sentiment-index


GBP (Sterling) – https://tradingeconomics.com/united-kingdom/zew-economic-sentiment-index

What do traders care about the ZEW Economic Sentiment Index and its impact on the currency?

ZEW Economic Sentiment represents nothing but the Economic Sentiment, which often drives economies. When people believe that the economy will not perform well in the near future, they mentally and financially start getting prepared for it, due to the belief which they had formed and made them save more and spend less for the upcoming decline. Because everyone is saving more and spending less, retail sales decline and have an effect on the revenue for the consumer companies. As earnings are bad, the corporate start to cut jobs, which creates layoffs and hence a plunge in the financial markets and crash in the economy.

ZEW Economy Sentiment is a type of fundamental analysis for the short term traders rather than long term trades. This indicator is based on sentiment, and the whole of the Forex market is simply a collection of all those thoughts, feelings, and actions. If people have jobs, economic data is robust, and interest rates are rising, which is driven by positive sentiment. Residents would then expect the currency of that nation to move higher over the long run. People and Investment banks want to invest in growing and stable economies that are performing well. An important rule of sentiment is that more something is known to the market, the less of an impact it will generally have. This is essential, and one needs to keep in mind when trying to identify ZEW Sentiment and the expected market reaction caused by that sentiment.

Frequency of the release

The ZEW Economic Sentiment survey is conducted every month and is used as a basis for forecasting the economic condition of Germany for the next six months. This survey shows a balance between those economy experts who believe Germany has a bright to those who are negative. The Economic Sentiment covers several other countries and regions apart from Germany, which includes Japan, United States, Eurozone, UK, France, and Italy. The Council of ZEW uses various indicators to predict a six-month future for the economy.

The Bottom Line

ZEW Sentiment, like any other fundamental indicator, has its own importance as it represents the mood of the market in the trading session similar to price action, which we see it unfolding in front of us. Currencies tend to move a lot, which is attached to this sentiment. ZEW Sentiment has a high-interest rate yield associated with the particular economy because the purchaser of the currency gets a share in the interest yield. Large asset management firms love this guaranteed high-interest rate and price speculation around that currency which cause a rally in the currency.



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