EUR/USD has steadied in the Friday session, after recording considerable losses on Thursday. Currently, the pair is trading at 1.1646, up 0.03% on the day. On the release front, French indicators missed their forecasts. French GDP for the second quarter dropped 0.2%, short of the estimate of 0.3%. This marked the lowest gain since Q3 in 2016. French consumer spending dropped sharply 0.1%, short of the forecast of 0.6%. In Germany, import prices dropped 0.5% in June, down sharply from the 1.6% gain a month earlier. Still, this beat the estimate of 0.5%. The U.S will release Advance GDP for Q2, with the markets expecting a strong gain of 4.2%. As well, UoM Consumer Sentiment is forecast to drop to 97.1 points.
There were no surprises from the ECB, which made no changes to monetary policy at its Thursday meeting. The main refinancing rate remains at 0.0%, which has been pegged since January 2016. In a policy statement, policymakers reiterated that rates would remain at current levels “through the summer of 2019”, and “as long as necessary to boost inflation to the target of just under 2.0%. There has been some discussion as to the exact meaning of “through the summer”, but what is clear is that the ECB plans to keep rates at a flat 0.00% after winding up its bond-purchase scheme at the end of the year. This weighed negatively on the euro, which dropped 0.07% on Thursday. The exact timing of a rate hike will depend on the strength of the eurozone economy and inflation levels – if the second half of 2018 is marked by stronger growth and higher inflation, there will be pressure on the ECB to raise rates earlier rather than later in 2019.
Investors remain concerned over global trade tensions, as tit-for-tat tariffs between the U.S and its trading partners have been weighing on the euro. However, the mood brightened on Wednesday, as the U.S. and the European Union surprised the markets, talking “reconciliation” rather than “retaliation”. On Wednesday, EU Commission President Jean-Claude Juckner met with President Trump, and the two leaders agreed to take concrete steps to eliminate tariffs and improve the trade relationship between the U.S and the EU, which has been battered in recent weeks. President Trump agreed to hold back on any further tariffs while talks are ongoing. This is a major concession from Trump, who just last week had threatened to impose tariffs on European car imports. U.S tariffs on European aluminum and steel will remain in place, but Juckner pointed out that the U.S has agreed to reassess these measures. The surprise agreement eases fears of a full-blown transatlantic trade war and the markets are hopeful that the flexibility the U.S has shown to the EU will also apply towards China and the NAFTA talks with Canada and Mexico.
