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Fundamental Analysis

Euro Yawns As German CPI Matches Estimate

Typography

EUR/USD continues to show little movement, as the pair has inched lower in Friday trade. Currently, the pair is trading at 1.1750, down 0.19% on the day. On the release front, German Final CPI improved to 0.4%, matching the forecast. German Final WPI was unable to keep pace, posting a decline of 0.1%, well below the forecast of 0.3%. In the US, the focus is on inflation numbers, with the release of CPI and Core CPI. Both key indicators are expected to post a small gain of 0.2%. We’ll also hear from two FMOC members, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari.

Global markets remain jittery over rising tensions between North Korea and the US. With the war of words escalating between the two countries, global markets are down, as investors have dumped shares in favor of safe-haven assets, such as the Japanese yen and gold. North Korea has vowed to retaliate over new sanctions imposed by Washington and has threatened to attack Guam, which is a major US military base. President Trump and North Korean President Kim Jong-un are on a possible collision course, which has caused alarm in South Korea and Japan, strong allies of the US. The present situation is being compared to the Cuban Missile crisis, and although the likelihood of actual hostilities breaking out remains small, the crisis has reached levels where the markets cannot ignore it.

The ECB hasn’t said much about its asset purchases program (QE) in recent months, but that could change soon. In July, the bank said it would hold discussions on the scheme in “the autumn”, and analysts are split as to whether that means September or October. Either way, this means that the markets expect to hear shortly from the ECB that it will begin winding down its aggressive QE policy, given the stronger economic conditions in the euro zone. The bloc’s economy is forecast to expand a healthy 2.0% this year, and the eurozone outperformed both the US and the UK in the first half of 2017. The sore point remains inflation, which is stuck at low levels, despite the ECB’s ultra-accommodative monetary policy. Another factor which policymakers must deal with is the ECB’s bloated balance sheet, which stands at more than EUR 2 trillion. With the Federal Reserve expected to begin trimming its balance sheet as early as September, investors will be keeping a close eye on the ECB and the Fed once the summer is over.

The markets are looking for some clarity from the Federal Reserve, which is showing signs of backtracking on another rate hike in 2017. Earlier this year, the Fed strongly hinted that it planned to raise rates three times in this year, but so far has only pressed the rate trigger twice, in March and June. After the June hike, Fed Chair Janet Yellen shrugged off concerns over low inflation, saying that it was due to “transient” factors. However, inflation has not improved and the Fed has changed its tune. Last week, St. Louis Federal Reserve President James Bullard said he opposed further Fed hikes, warning that another hike would actually delay inflation from hitting the Fed’s target of 2%. The Fed appears uncertain about when to raise rates, and predictably, this hesitancy is making investors skeptical that the Fed will act. There is little chance that the Fed will make any moves at the September and November meetings, and the odds of a rate hike in December are currently at 42%. Analysts are hoping for some insight into the Fed’s thinking when the Fed Reserve Dallas President Robert Kaplan and Minneapolis President Neel Kashkari deliver speeches on Friday.

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