The euro is steady in the Tuesday session. Currently, EUR/USD is trading at 1.2255, down 0.07% on the day. In economic news, Germany released inflation figures. Final CPI improved to 0.6%, matching the forecast. WPI declined 0.3%, missing the estimate of +0.3%. In the US, the sole event on the schedule is the Empire State Manufacturing Index. The indicator is expected to climb to 18.4 points. On Wednesday, the eurozone releases Final CPI, and the US will publish two industrial reports.
The euro has impressed with its recent rally, climbing 2.4% since January 11. There are two key factors behind the upward trend. First, the ECB minutes from the December meeting were hawkish, leading to speculation that the ECB could wind up its asset purchase program in September. In the minutes, policymakers said that risks to the current outlook were to the upside, which could necessitate a gradual shift in guidance in the next few months. As for the eurozone, the minutes stated that the economy was displaying “continued robust and increasingly self-sustaining economic expansion”. Policymakers have echoed the sentiment that tighter policy could be on the way. On Monday, ECB Governing Council member Ardo Hansson said if the economy and inflation develop as expected, the ECB could wind up the asset purchase program in one shot after September. The second factor is major progress in coalition negotiations in Germany. There was a report on Friday that Angela Merkel’s conservative bloc and the Social Democrats have agreed on a coalition draft. This ends months of political uncertainty, which has eroded Merkel’s standing and also sidelined Germany on key issues such as Brexit and political reform in the eurozone. Still, the talks are only in the preliminary stage, and further negotiations will take at least several weeks before it is clear that the talks have been successful.
The dollar lost ground on Friday, as US consumer data for December was lukewarm. CPI slowed to 0.1%, down from 0.4% a month earlier. Core CPI was stronger, improving to 0.3%. Both indicators were within expectations, but pointed to weak inflation levels. On the bright side, consumer spending remained strong. December retail sales, buoyed by Christmas shopping, were up 5.4% compared to a year ago. Although investors were not impressed with the December data, as the euro rally continued, the spending numbers point to a strong finish for the US economy in 2017.
