After three straight losing sessions, EUR/USD has reversed directions and posted slight gains. In the Thursday session, the pair is trading at 1.1249, up 0.28% on the day. On the release front, German ZEW Economic Sentiment posted a dismal reading of -24.1, just above the estimate of -24.2 points. Eurozone ZEW Economic Sentiment fell to -22.0, much weaker than the estimate of -17.3 points. There are no major U.S. events for a second straight day. On Wednesday, there are key indicators on both sides of the pond. Germany and the eurozone will release GDP, while the U.S. releases CPI reports.
Inflation continues to rise higher in the United States. On Friday, the Producer Price Index (PPI) jumped 0.6%, its sharpest gain since January 2017. This easily beat the estimate of 0.2%. Core PPI was also sharp, with a gain of 0.5%, compared to a gain of 0.2%. Stronger inflation will reinforce expectations that the Fed will hike rates hike in December. Currently, the odds of a quarter-percent rate hike stands at 76%. On the consumer front, UoM consumer sentiment dropped to 98.3, down from 99.0 points. Still, this beat the forecast of 98.0 points.
The deadlock between Italy and the EU over Italy’s budget continues to weigh on the markets. The EU Commission has set midnight Tuesday as a deadline for Italy to revise its budget by Tuesday, which it argues raises Italy’s debt and is in breach of EU fiscal rules. However, Italian officials have flatly rejected the EU demands. Matteo Salvini, Italy’s interior minister, stated that the government would not change the budget by “one iota”. The EU could respond with stiff fines, worth billions of euros. There is serious concern in Brussels about that overspending by the Italian government could hurt Italian stocks and bonds, destabilize the banking sector and even lead to contagion in other eurozone members. With Rome and Brussels on a collision course, the fallout could weigh on European stock markets and the euro.
The Fed shows no signs of easing up on interest rate hikes, with Fed policymakers stating that interest rates will continue to rise until the “neutral rate” of between 2.5 percent and 3.5 percent is reached. This means we can expect rate hikes once a quarter in 2019, barring a sharp downturn in the economy. The policy of gradual increases is good news for the U.S dollar, and conversely is bearish for the euro, as higher interest rates means that the greenback is more attractive to investors.
