EUR/USD has posted slight gains in the Friday session. Currently, the pair is trading just above the 1.06 line. On the release front, German numbers were mixed. The trade surplus was almost unchanged at EUR 18.5 billion, short of the estimate of 19.2 billion. There was better news on the inflation front, as German WPI posted a gain of 0.5%, beating the forecast of 0.3%. In the US, employment numbers will be on center stage, with the release of three key indicators – Nonfarm Payrolls, Average Hourly Earnings and the unemployment rate. The Nonfarm payrolls report is expected to drop to 200 thousand, while wages are forecast to improve to 0.3%. Traders should be prepared for some volatility in the currency markets during the North American session.
As expected, the ECB held course and maintained interest rates at a flat 0.00% on Thursday. ECB President Mark Draghi focused on nuances, noting that the central bank removed one phrase from its standard introductory statement – ‘using all the instruments available within its mandate’. Draghi added that the removal of this phrase means that the ECB ‘no longer has a sense of urgency in taking further actions …. prompted by the risk of deflation’. With growth and inflation showing signs of improvement, the ECB has been under pressure to tighten policy and reduce its asset-purchase program. Germany, in particular, is unhappy with the ECB’s ultra-loose policy and on Thursday, German Finance Minister Wolfgang Schaeuble bluntly stated that he wanted to see a ‘timely start to the exit’ from the ECB’s asset-purchase scheme. For his part, Mario Draghi must balance the improved economy with upcoming elections in France, Germany and the Netherlands. Euro-skeptics are a strong force throughout Europe and Draghi is reluctant to make any moves which could be seized on by politicians. The ECB’s asset-purchase program is slated to end in December, but economic and political circumstances could trigger an earlier end to the program.
The Federal Reserve waited an entire year to raise rates in December, but appears ready to make a March move. The odds of a March hike continue to climb, and are currently at 88% percent, according to the CME Group. Fed policymakers have been dropping hints of a March move, and a red-hot labor market and higher inflation levels present further arguments in favor of higher rates. Earlier in the year, the Fed had said that it wanted to wait until it had a clearer idea of President Trump’s economic policy before it tightened monetary policy. However, Trump has not backed up his promises to reform the tax code and increase fiscal spending with any details. Some Fed policymakers wanted to raise rates earlier this year, so Fed Chair Yellen is under pressure to make a move, and it appears virtually certain that the Fed will raise rates by a quarter-point on March 15.
