The ZEW indices released on Tuesday have sided with the European currency, providing background support for buyers of the EUR/USD pair. Contrary to the cautious forecasts of most analysts, the German economic sentiment index rose significantly, and similar dynamics were observed at the Eurozone level. This suggests that the expert community is increasingly leaning toward the view that the European economy is gradually passing the lowest point of the cycle and preparing for recovery.

Specifically, the German economic expectations index rose in August from 26.3 to 34.2 points, against forecasts of growth to 30 points. This indicator has shown a consistent upward trend for the fourth consecutive month. For comparison, in April, this index was at -17.2. At the same time, the current situation index increased from -77.6 to -61.1 points. Thus, both expectations and perceptions regarding the state of the largest economy in the Eurozone have improved. The Eurozone's economic sentiment index demonstrated a similar trajectory, skyrocketing to 31.4 points, up from 23.4 (against weak growth forecasts to 25.4).

Such a noticeable increase in optimism among experts is largely due to strong quarterly corporate reports, sustained high export levels, and the active implementation of government infrastructure programs in Germany. Notably, significant progress has been recorded in the automotive industry (the corresponding sub-index rose by 22.2 points) and in the chemical, pharmaceutical, and engineering sectors.

Comparing the latest ZEW release with other macroeconomic signals reveals a fairly telling picture. For example, Eurozone GDP grew by 0.4% quarter-on-quarter in the second quarter, after a flat performance in the first quarter. Simultaneously, employment increased by 0.1%, and annual GDP growth accelerated to 1.0%. Against this backdrop, the ZEW release serves as an important leading indicator suggesting that financial market experts are building expectations for further improvement.

However, the main macroeconomic intrigue of the week (for the euro) is yet to come, as European PMI indices will be published on Friday. In June, the Eurozone composite PMI was in the expansion zone at 50.0. In July, this crucial macroeconomic indicator rose again—this time to 52.0. If the August data confirms the maintenance or acceleration of business activity, the ZEW will receive important corroboration from this timely indicator. Strong PMIs (especially an increase in new orders and employment) could solidify the picture of a sustainable recovery in the European economy.

This combination could "free the hands" of the European Central Bank hawks, at least in the context of tightening rhetoric. On one hand, the Eurozone economy shows signs of recovery (and the ZEW indices signal further improvement in expectations). At the same time, inflation in the Eurozone remains significantly above the European Central Bank's target level. In June, the overall CPI accelerated to 2.9% year-on-year, and according to most analysts' forecasts, this figure is expected to remain at the June level (the release is scheduled for Wednesday, August 19). All of this contributes to an increase in "hawkish" expectations regarding further ECB action. This is especially true given that the oil market has once again surpassed the $90-per-barrel mark amid another round of escalation in the Middle East. The longer Brent remains at such levels, the greater the likelihood of secondary inflation effects on transportation costs, production, and final prices.

In this context, the likelihood of another ECB rate hike in September has increased significantly. According to the latest Reuters poll, about 80% of economists expect a 25-basis-point increase in the deposit rate this fall. They argue that two factors support such a decision: unexpectedly resilient economic activity and ongoing energy shocks that exacerbate inflationary risks.

The "green" indicators from the ZEW, in this context, are yet another piece of the puzzle for a hawkish ECB scenario, as resilient economic expectations give the central bank more room for further monetary policy tightening. If Friday's PMIs also land in the green zone, and Brent continues to trade above the $90 mark, the possibility of a September rate hike will turn from a "possible" to a "baseline" scenario.

The EUR/USD pair reacted rather weakly to the report: buyers updated the intraday high (1.1586) but could not extend their success, remaining within the established price range of 1.1560–1.1610 (the middle and upper lines of the Bollinger Bands on the H4 chart). This suggests that the ZEW indices have more of a "delayed" market effect, while in the short-term horizon, traders' attention remains focused on the geopolitical agenda. The ongoing uncertainty regarding the prospects of U.S.-Iranian relations is restraining EUR/USD traders—both buyers and sellers. Therefore, despite the positive signal from the ZEW, the pair is likely to remain range-bound within the aforementioned price corridor of 1.1560–1.1610 in the near term.