EUR/USD has recorded slight losses in the Friday session, as the pair trades at 1.0650. The week wraps up with two minor events. Eurozone Current Account dropped to EUR 30.1 billion, compared to EUR 36.1 billion. Still, this figure beat the estimate of EUR 28.7 billion. Over in the US, CB Leading Index improved to 0.5% in December, its best level since April. The estimate for January remains at 0.5%.
The US economy continues to perform well, as underscored by sharp economic data on Thursday. Unemployment claims were slightly higher at 239 thousand, but beat the forecast of 245 thousand. On the manufacturing front, the Philly Fed Manufacturing Index soared to 43.3 points, crushing the estimate of 18.5 points. This marked its highest level since 2011. Earlier in the week, the Empire State Manufacturing Index also climbed sharply, with a reading of 18.7, compared to the forecast of 7.2 points. The surprisingly strong data is welcome news from the manufacturing sector, which like other industrialized countries, has been battered by globalization. President Trump has promised to bring manufacturing jobs back to the US and invigorate the struggling sector. There was more good news from the inflation front, as PPI and CPI posted respectable gains of 0.6% in January, above their estimates.
Federal Reserve Chair Janet Yellen is in the enviable position of having to decide how the Fed should respond to a strong US economy. Earlier this week, as she made her semi-annual appearance before Congress. In her testimony, Yellen was upbeat about the 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. A rate hike appears to be just a question of time, as Yellen warned that “waiting too long to remove accommodation would be unwise”. If the US economy stays on track in 2017, analysts expect two or three small rate hikes. 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. Barring an unexpected tailspin from the economy, the Fed is likely to raise rates in the first half of 2017.
With the eurozone economy showing signs of recovery in recent months, ECB President Mario Draghi can sleep easier. 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 whether to tighten 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, but is not expected to make any moves. Still, any hints towards a tighter monetary stance would likely boost the euro.
