The week ahead sees the spotlight turn to Germany's key Ifo business sentiment survey as worries about the euro zone's sluggish recovery grow - cementing perceptions that interest rates may fall soon.
Geopolitical developments in the aftermath of the Madrid bombs were expected to remain in focus, especially after news that Pakistani forces are closing in on a key al Qaeda member.
Worries that the Madrid attacks have undermined euro zone confidence also means sentiment data is in focus. March Belgium business confidence numbers and Italian consumer confidence data are due during the week. The March German Ifo survey is out on Friday and could boost expectations of a near-term euro zone rate cut if it points to a sharp deterioration in business sentiment, analysts said.
"The euro zone should be quite interesting from the point of view that speculation is mounting that the European Central Bank will ease rates," said David Brown, chief European economist at Bear Stearns in London.
"The Ifo index will be an absolutely critical number for market rate expectations and if there is an implosion of sentiment as seen in the ZEW survey, a rate cut will be seen as more likely."
The ZEW survey is seen a good pointer to the closely-watched Ifo index and showed investors' confidence in the economic outlook plunged in March as worries grew about the sluggishness of Europe's recovery and the Madrid bombings.
Economists polled by Reuters expect the Ifo index fell to 95.95 in March from 96.4 in February.
Concerns that the Madrid blasts will undermine confidence and hurt the economic recovery have boosted market rate-cut expectations - money markets now attach a 50 percent chance to a quarter point hike by June.
"Geopolitical concerns will continue to be an issue," said Audrey Childe-Freeman, senior European economist at CIBC World Markets. "The Madrid attack was a reminder that the war on terror is not over and has bought back a safe-haven trading mentality, which we haven't seen for a year."
Renewed fears about global security have lifted safe-haven assets like government bonds and the Swiss franc but hit stocks.
Bundsbank President Ernst Welteke, Bank of France Governor Christian Noyer, German Finance Minister Hans Eichel and his French counterpart Francis Mer hold a press conference following latest Franco-German economic summit. "In a context where we are seeing softer economic indicators the ECB will continue to moderate its tone and this could renew talk about rate cuts," said Childe-Freeman.
Euro zone M3 money supply growth data is released on Friday.
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