Introduction
The economy, financial, and forex markets are mainly driven by sentiment. Abstract aspects of demand and supply primarily drive these markets. A financial asset’s value will appreciate if a majority of investors believe that its future cash flows will increase. Conversely, the value of the asset will lower if these investors have a negative outlook on it. Therefore, knowing how most investors feel about the outlook of the economy can help you plan your future investments properly.
Understanding Sentix Investor Confidence
Investor confidence indexes are usually estimated by conducting surveys on investors and analysts throughout the economy.
In the EU, for example, the investors’ confidence is gauged using the ‘EU Sentix Investor Confidence’ index. Sentix is a German marketing and research firm predominantly dealing with behavioral finance. This index is compiled through a survey of about 2800 investors and analysts from across the 17-EU member countries. The primary role of the index is to obtain the confidence of the business people about the current economic climate and their anticipation about the future economy.
Sentix Investor Confidence Methodology
The Euro area Sentix economic report is categorized into the current situation and Expectations.
Current situation: This part of the report polls how the investors and analysts feel about the prevailing economic conditions. Ongoing geopolitical aspects inform the current economic conditions to the prevailing market conditions.
Source: Sentix
Expectations: As the name suggests, this part of the report concerns the future. Investors and analysts are polled to see what they think the future economic conditions will be. Do they expect the current conditions to improve, remain the same or deteriorate?
Both these parts of the report accommodate various economic indicators about the economy. The investors and analysts are asked their sentiments on various aspects of the economy, from the ease of doing business, labor conditions, interest rates to geopolitics.
As mentioned, Sentix surveys up to 2800 people who are mostly employees and investors in the private sector. The survey is conducted to ensure inclusivity of all economic sectors, thus obtaining a representative perspective about the state of the economy.
The results from the questionnaires are collated and indexed on a scale of -100 to 100. Readings of below 0 indicate that investors and analysts are pessimistic about the economy, with the severity of their pessimism increasing as the index approaches -100. On the other hand, a reading of above 0 shows optimism. The higher the index, the more optimistic the investors are about the economy.
Source: Sentix
Using Sentix Investor Confidence for Analysis
Keep in mind that the polled people for this index are experts – presumably authoritative in their various fields. Therefore, by following
Sentix
level of confidence in the economy can be incredibly helpful in making predictions about the economy at large.
Investments, in any economy, forms a major part of economic growth. When investors have a positive outlook about the economy, current, and future, we can expect them to make more investments in various sectors of the economy. Naturally, these investments create more jobs in the economy, increasing economic output, improving households’ welfare, and growing the GDP.
On the other hand, when the investors hold a negative outlook about the economy, they will halt any further investment plans. Some may go as far as cutting back on their investments. In this scenario, the industries in which they have invested in will be forced to scale down their operations. Consequently, the economy can expect a higher unemployment rate, depressed demand in the economy, reduced output, and a general contraction in the GDP.
Note that the current and the expectations of investor confidence aren’t always aligned. Policymakers can use this knowledge to make informed decisions on monetary and fiscal policies. When investors are confident about the current economic conditions but pessimists about the future, theoretically, governments and central banks could implement expansionary policies. Such policies will stimulate the economy and prevent any job losses, or adverse contractions of the economy in case investors shy away from further investing.
Furthermore, Sentix investor confidence is a vital indicator of recessions and recoveries. Let’s take the example of the ongoing coronavirus-induced recession. Towards the end of the first quarter of the year, investors were pessimistic about the future. They anticipated that the ravaging effects of the coronavirus would severely affect the economy. And true, as anticipated, the economy was ravaged. New investments during the months following the outbreak were at historic lows, and the unemployment levels globally were the highest ever witnessed. The Sentix investor confidence forestalls the current recession.
Similarly, the Sentix investor confidence index can be used to show signs of economic recoveries. Let’s still consider the example of the recent coronavirus pandemic; the Sentix investor confidence has been accurately used to show economic recovery signs. After governments and the European Central Bank (ECB) put in place economic expansionary measures, the Sentix investor confidence became less and less pessimistic. This showed that investors anticipated that the economy would recover.
Source: Sentix
Impact of Sentix Investor Confidence on Currency
As we mentioned earlier, sentiment is one of the major drivers of currency fluctuations. When the investor confidence is highly optimistic or improving from extreme pessimism, the domestic currency will appreciate. This appreciation is because investor confidence signals improvement in the economic condition, followed by lower unemployment levels, better living standards, and higher GDP levels.
Conversely, dropping levels in the Sentix investor confidence leads to the depreciation of the domestic currency relative to others. The depreciation is because forex traders will anticipate that adverse economic conditions will follow.
Sources of Data
Sentix conducts the surveys and publishes the Sentix Investor Confidence index for the Euro area.
How Sentix Investor Confidence Index Release Affects The Forex Price Charts
Sentix released the latest EU investor confidence index on October 5, 2020, at 8.30 AM GMT. The release of the index can be accessed at Investing.com. Since the investor confidence index is a low-impact indicator, low volatility is expected on the EUR.
In October 2020, the Sentix Investor Confidence index was -8.3 compared to -8.0 in September 2020. However, the October reading was better than the expected -9.5.
Let’s find out how the October 2020 Sentix Investor Confidence index’s release impacted the ERU/USD price action.
EUR/USD: Before the Sentix Investor Confidence Index Release on October 5, 2020, just before 8.30 AM GMT
Before the release of the Sentix Investor Confidence Index, the EUR/USD pair was trading in a steady uptrend. The above 5-minute chart shows candles crossing above the 20-period MA and forming further above it.
EUR/USD: After the Sentix Investor Confidence Index Release on October 5, 2020, at 8.30 AM GMT
After the release of the index, the EUR/USD pair formed a 5-minute bearish candle. However, the pair subsequently adopted a strong uptrend. The 20-period MA rose steeply with candles forming further above it. This trend shows that the EUR became stronger after the release.
Bottom Line
In the forex market, the Sentix Investor Confidence index is a low-impact indicator. In the current economic climate, however, this index can prove invaluable in predicting the directions of the economy – to show whether the Euro area economy is bouncing back from the effects of the coronavirus pandemic.