The euro is almost unchanged in the Tuesday session, as the pair trades at the 1.12 level. On the release front, German ZEW Economic Sentiment dipped to 18.6, missing the forecast of 21.6 points. However, Eurozone ZEW Economic Sentiment improved to 37.7, beating the estimate of 37.2 points. In the US, PPI, a key inflation index, is expected to drop to 0.0%. Wednesday will be busy in the US, which releases retail sales and CPI reports. As well, the Federal Reserve is expected to increase interest rates by a quarter-point.
Unlike the stunning election in the UK, which has left the country in political turmoil, there was muted reaction to the parliamentary elections in France. The first round was held on Sunday, and the second round, slated for June 18, will determine the makeup of the 557-seat National Assembly. French President Emmanuel Macron has hit a chord with the public with his call for a united, prosperous France, and he appears headed for a massive majority in parliament. The traditional left-right divide in French politics appears to have dissolved, at least for now, as Macron’s En Marche party, which is barely a year old, is poised to take over France. Macron is expected to put forward pro-business legislation, which will not sit well with the powerful labor unions. Macron wants to streamline government and overhaul labor laws, in order to kickstart the economy and create jobs. Any changes to France’s generous employment benefits is bound it be contentious, but a strong majority in parliament will make Macron’s job easier.
It’s Rate Day on Wednesday, as the Federal Reserve holds its monthly policy meeting. The markets have priced in a quarter-point hike, which would be the second increase in 2017. The likelihood continues to hover around the 90% level, so it would be a shock if the Fed did not make a move. What’s in store after that? An additional rate hike seems much less likely in the third quarter, with the CME forecasting the odds of a September move at just 26%. The markets are skeptical about another rate hike in the second half, unless the political situation in Washington shows signs of stabilizing. The Trump administration remains in damage control mode, as it’s difficult to assess the damage from the dramatic evidence of ex-FBI director James Comey. The Trump administration continues to lurch from one crisis to another, and President Trump seems disconnected not just from the Democrats, but from many Republican lawmakers as well. The Fed and the markets have serious concerns with regard to Trump’s ability to move forward with his economic agenda, and this sentiment could weigh on the US dollar.
