The euro has recorded slight gains in the Friday session, as EUR/USD is trading at 1.1170. In economic news, Eurozone Final CPI dropped to 1.4%, matching the estimate. In the US, it’s a busy day, with three key indicators – Building Permits, Housing Starts and UoM Consumer Sentiment.
France’s election season will wrap up on Sunday, when voters go to the polls in the second round of the parliamentary election. At stake are the 577 seats in the National Assembly. French President Emmanuel Macron is expected to win a landslide majority, with some polls giving Macron’s En Marche party a staggering 80% of the vote. Macron has run on a pro-business agenda, which includes overhauling France’s labor laws and making the economy more competitive. As well, Macron is a strong supporter of the European Union, and a Macron-Merkel alliance could strengthen the EU at a time when Brexit and nationalistic parties on the continent have undermined European unity. Macron, who is expected to support a hard line against Brexit, met with British Prime Minister Theresa May earlier this week. Macron said that the EU would leave the “door open” in case Britain changed its mind and decided to stay in the club, but May is unlikely to take up the French President’s invitation.
Following weeks of broad hints that a rate hike was coming, the Federal Reserve pressed the rate trigger at this week’s June meeting, marking its second rate hike in 2017. The Fed increased rates by 25 basis points, to a target range of 1.00 percent to 1.25 percent. Fed policymakers sounded upbeat in the rate statement, which that was more hawkish than expected. The statement portrayed an optimistic picture, noting that the economy was growing and the labor market remained strong. Concerns over low inflation were brushed aside, as the statement noted that although inflation remains below the Fed’s target of 2.0%, it expected that target to be reached in the “medium term”. The Fed projected one more rate hike in 2017, and analysts were quick to circle December meeting as the most likely date. However, the markets don’t appear to share the Fed’s optimism as far as another rate hike this year. The odds for a September increase are at 18%, compared to 23% a week ago, according to the CME Group. As for a December increase, the odds stand at just 38%.
Although the rate hike was widely expected, the Fed still managed to surprise the markets. Earlier in the year, the Fed mentioned its goal of reducing its $4.2 billion balance sheet (comprised of Treasury bonds and mortgage-backed securities). Fed Chair Janet Yellen revisited this issue at her follow-up press conference on Wednesday. Yellen was short on specifics, saying that the goal was to begin the normalization “relatively soon”. The Fed balance sheet ballooned after the financial crisis in 2008, as the Fed implemented a massive quantitative easing program as part of its accommodative monetary policy, together with interest rates of zero. The gradual reduction in the purchase of these assets is significant for the markets, as signifies a vote of confidence in the strength of the US economy.
