EUR/USD is showing limited movement in the Thursday session. Currently, the pair is trading at 1.0540. its lowest level since January 11. On the release front, German numbers were a mixed bag. Final GDP came in at 0.4%, matching the forecast. This figure was unchanged from the Preliminary GDP gain of 0.4%. German GfK Consumer Confidence dipped to 10.0, shy of the forecast of 10.3 points. In the US, today’s highlight is unemployment claims, with an estimate of 242 thousand. As well, Treasury Secretary Robert Mnuchin will speak at an interview with CNBC.
The euro remains under pressure this week. On Wednesday, EUR/USD briefly dropped below the 1.05 line, for the first time since January 11. The euro has endured a rough February, losing 2.4% in value and wiping out the January gains. The struggling continental currency is unlikely to get a lifeline from the ECB, which recently extended its asset-purchase program until December 2017. Although the eurozone is enjoying a moderate spurt in growth and higher inflation, the central bank appears in no rush to tighten monetary policy, which would boost the euro. Analysts note that the ECB does not wish to make any dramatic moves close to crucial elections in Europe (France goes to the polls in April, followed by Germany in September). At the same time, the political turmoil in Europe is affecting investor confidence and appetite for risk. First, there was the stunning Brexit vote which has thrown Britain-EU relations into crisis mode. In France, Marine Le Pen, leader of the far-right National Front, is the front-runner in the first round and could conceivably be elected president. Le Pen wants to take France out of the eurozone and has promised a referendum on French membership in the EU. Germany’s Angela Merkel, a pillar of stability on the continent, is in a tough election fight and voters may choose change rather than hand her a fourth term in office. All of this “political risk” has made it difficult for the ECB to take action, and Mario Draghi could well choose to play it safe and stay on the sidelines for the remainder of the year.
On Wednesday, the Federal Reserve released the minutes of its January policy meeting. However, there were no dramatic nuggets in the minutes. The Fed stated that a rate hike “fairly soon” could be appropriate in order to head off an overheated economy. The minutes indicated that Fed policymakers remain confident that the central bank will raise rates gradually, given the strong performance of the US economy. At the same time, the minutes noted uncertainty about President Trump’s fiscal stimulus plan but little concern about the risk of inflation. Bottom line? Although pressure is slowly building towards a rate hike, there does not appear a sense of urgency to raise rates at the next meeting in March. According to the CME Group, the odds of a March hike are only at 17%, while the likelihood of a hike in either May or June stands above 40%.
