EUR/USD has ticked higher in the Thursday session, as the pair trades at 1.0640. On the release front, the ECB releases the minutes of its January monetary policy meeting. It’s another busy day in the US, with three key events on the calendar – Building Permits, Philly Fed Manufacturing Index and Unemployment Claims.
The spotlight was on Fed chair Janet Yellen earlier this week, as she made her semi-annual appearance before Congress. In her testimony, Yellen was upbeat about the US economy. She noted that inflation is moving towards the Fed’s 2 percent target, the labor market remains red-hot and consumer spending is strong. Yellen has an enviable task – when is the appropriate time to raise rates in order to cool down the economy – in June or as early as March? A rate hike is a question of “when” rather than “if”, as Yellen warned that “waiting too long to remove accommodation would be unwise”. At the same time, the Fed needs to take into account the economic stance of the new administration, which remains unclear. President Trump has promised to outline a tax reform plan in a few weeks, but has left the Fed and the markets in the dark regarding economic policy. Unless the economy takes an unexpected turn downwards, it’s very likely that the Fed will press the rate trigger by June.
Across the pond, ECB President Mario Draghi can sleep easier, as the eurozone has been showing signs of recovery in recent months. The economy is expanding at a moderate rate, and inflation is pointing higher. This is good news for the ECB, which can now focus on possibly tightening monetary policy. If the ECB feels that the economic numbers will continue to point in the right direction, the central bank could taper its asset-purchase program or raise interest rates, which are currently at zero. ECB head Mario Draghi will likely remain cautious, with Brexit negotiations looming and elections in France and Germany coming up. Still, if the eurozone economy continues to grow and inflation levels move higher, we could see the ECB change its monetary stance later in the year. The ECB hold its next policy meeting on March 9, and if economic data remains steady, there will be pressure on the ECB to tighten monetary policy.
