The euro has started the week quietly, as EUR/USD trades at the 1.09 line. German and French banks and stock markets are closed for the May 1 holiday, so we can expect the lack of movement to continue during the day. In the US, Treasury Secretary Steven Mnuchin will speak at a conference in Los Angeles. On the economic front, the US will release Personal Spending and ISM Manufacturing PMI.
Eurozone inflation data remains at high levels. A Eurostat flash estimate indicated that CPI will improve to 1.9% in April, compared to 1.5% in March. Although this figure is close to the ECB inflation target of about 2 percent, the markets are not expecting Mario Draghi & Co. to make any monetary moves just yet. Last week, the ECB held rates at a flat 0.0%, and Draghi sent a dovish message out to the markets, saying that the ECB’s inflation forecast remained unchanged. The current ultra-loose policy, which includes a quantitative easing program of EUR 60 billion/mth, has been in place since 2008. Draghi acknowledged that the eurozone is in better shape, noting that economic conditions had improved and downside risks had decreased. There had been speculation that the ECB might taper or bring forward its asset-purchase program, which runs until December. The ECB holds its next meeting in June, and the markets will again be looking for some tightening from the ECB.
The French presidential election is in full swing, but the euro showed little movement last week. Will the trend change this week? Voters will be back at the ballot boxes on Sunday, and the markets have priced in a victory by Emmanuel Macron over Marie Le Pen. A major reason for the euro’s lack of activity is that opinion polls before the first round were fairly accurate, correctly forecasting that Macron would win 24% of the vote and Le Pen 22%, with both advancing to the May 7 runoff. The markets are thus relying on the polls for the second round, which continue to show Macron with a comfortable lead of 60-40. Le Pen is a heavy underdog, compounded by the fact that some candidates from the first round as well as former President Francois Hollande have publicly called for voters to support Macron. At the same time, any changes in opinion polls could quickly translate into volatility for EUR/USD.
After some feverish negotiations on Capitol Hill, lawmakers have reached a deal which averts a partial government shutdown. The short-term spending deal, which has bipartisan support, provides funding for government services until September 30th. The deal does not include any funding for a border wall with Mexico, marking a clear concession on the part of President Trump. Still, after a rocky 100 days in office, Trump could ill afford the embarrassment of the federal government running out of funds so early on his watch.
