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EUR/USD has posted considerable gains in the Thursday session. Currently, the pair is trading at 1.0770. On the release front, German PPI dipped to 0.0%, short of the estimate of 0.2%. In the US, the markets are bracing for weaker readings from two key indicators – Philly Fed Manufacturing Index and unemployment claims. On Friday, the Eurozone and Germany release PPI reports, and the markets will be keeping a close eye on the PMI manufacturing numbers.
All eyes are focused on the French presidential election, with the first round of voting slated for April 23. The race is one of the tightest in decades, with the four front-runners clustered within a few percentage points. Given the closeness and unpredictability of the election, it’s no surprise that final opinion polls before the vote are moving markets. A Harris Interactive opinion poll published on Thursday showed centrist Emmanuel Macron gaining ground, with 25% of the vote. Far-right candidate Marine Le Pen follows with 22%. Next are Republican candidate Francois Fillon and left-wing candidate Jean-Luc Melenchon, both tied at 19%. Le Pen and Melenchon want to hold a referendum on French membership in the EU, so the markets are clearly more comfortable with Macron and Fillion. With this poll showing Macron with a slight lead, the euro has responded positively, climbing to its highest level since March 29. The markets are expecting more volatility as we near Election Day, and French banks will be staffed throughout Sunday night in order to respond quickly to developments in the currency markets after the election results.
Eurozone consumer inflation has been steadily rising, but reversed directions in March. Final CPI slipped to 1.5%, compared to 2.0% a month earlier. The indicator has been steadily rising, and climbed to 2.0% in February, which is the ECB’s inflation target. This had led to speculation that the ECB might have to consider tightening its monetary policy, either by lowering interest rates or tapering its asset-purchase program (QE). The ECB’s asset-purchase program is scheduled to remain in place until December, although the central bank could opt to bring up that date or taper the program if growth and inflation numbers in the Eurozone are unexpectedly strong. There are also political considerations at play, as the ECB is reluctant to make any significant monetary moves with upcoming elections in France and Germany.
With the US economy continuing to perform well, the markets are expecting the Fed to continue to gradually raise rates in 2017. The Fed has broadly hinted that it plans two more rate hikes this year, but there have been calls from some Fed policymakers for three more hikes. However, soft retail sales and CPI numbers in March are likely to make the Fed more dovish, and on Tuesday, the Atlanta and New York Federal Reserve lowered their outlook for US economic growth for the first quarter. The Fed can point to a labor market that is close to capacity as well as strong consumer confidence, but surprisingly, this has not translated into stronger consumer spending, a key driver of economic growth. The odds of a June hike have slipped to 46% according to the CME Group, down sharply from 65% in early April.
