EUR/USD continues to have a quiet week. Currently, the pair is trading at 1.1751, down 0.01% on the day. On the release front, there are no German or European indicators on the schedule. In the US, the focus is on employment numbers, with the release of Preliminary Nonfarm Productivity and Preliminary Unit Labor Costs. On Thursday, there are two key events – PPI and unemployment claims.
With the eurozone continuing to show solid growth in 2017, the ECB’s quantitative easing program (QE) is coming under closer scrutiny. The scheme is scheduled to end in December, although this is not a drop-dead date – the ECB has been careful to state that QE could be extended “if necessary”. The ECB hold its next policy meeting in September 7, and there is a strong possibility that the bank will make an announcement regarding tapering QE, which could start in early 2018. The problem facing policymakers is that despite a stronger labor market and improved growth, inflation levels remain stubbornly low, as the ECB’s inflation target of 2% has proven overly optimistic. The ECB is well aware that any talk of tighter policy could send the euro higher, as was the case in June, when investors snapped up euros after Mario Draghi made some hawkish comments at a meeting of central bankers. As far as interest rate moves, the ECB is unlikely to raise rates until its tapering process is well under way, meaning we’re unlikely to see any rate moves before the second half of 2018.
While the euro is enjoying a revival, it’s been the opposite story for the US dollar. Paralysis in Washington is weighing on the greenback, as Donald Trump’s antics and inability to pass healthcare legislation has increased political risk in the US. As well, the Federal Reserve’s monetary policy remains unclear. Earlier this year the Fed strongly hinted that it planned to raise rates three times in 2017, but has only pressed the rate trigger twice. In June, Fed Chair Janet Yellen shrugged off low inflation, saying that it was due to “transient” factors, leaving the impression that the Fed still planned one final hike. However, inflation has not improved and the Fed has changed its tune. Last week, St. Louis Federal Reserve President James Bullard said he opposed further Fed hikes, warning that another hike would actually delay inflation from hitting the Fed’s target of 2%. The markets have become more skeptical about a rate hike in December, as the odds have fallen to 33%, compared to 43% a week ago.
