The euro was quiet last week, as the euro stayed closed to the 1.12 level. Currently, EUR/USD is trading at 1.1190. On the release front, there are no major eurozone events. ECB President Mario Draghi will testify before the Economic and Monetary Affairs Committee in Brussels. US markets are closed for Memorial Day, so traders can expect the euro to remain subdued during the day. On Tuesday, Germany releases Preliminary CPI, and the highlight in the US is CB Consumer Spending.
The US economy expanded at an annual rate of 1.2%, according to its second estimate for GDP. This was considerably higher than the 0.7% gain which was reported in the first estimate in April. Still, this figure is the lowest in a year, and well of the 2.1% gain in Q4. Business spending remains weak, and although consumer confidence remains at high levels, consumer spending has not kept up, as retail sales was softer than expected in April. The manufacturing sector has hit some turbulence, with Core Durable Goods Orders posting a decline of 0.4% in April, its third decline in four months. After a shaky first quarter for the US economy, there are no indications as of yet that we’ll see a rebound in the second quarter? Will this lead to the Fed rethinking a June rate hike? The markets don’t think so, as the odds of a 0.25% rate hike have increased to 84%. At the same time, the likelihood of a rate hike in the second half of 2017 are low. The odds for a September rate are just 26%, with the markets unclear on whether the Fed will make further moves this year if inflation remains below the Fed target. Even if soft first quarter data was a blip, the markets (and possibly Fed policymakers) are concerned that President Trump, who is facing congressional investigations over his connections with the Russian government, may not be able to pass his agenda of cutting taxes and reigning in government spending.
The eurozone economy is looking brighter compared to a few months ago, as first quarter numbers have been solid. There were plenty of jitters at the start of the year, with the stunning election victory of Donald Trump, who ran on a protectionist campaign of “America first”. As well, the Brexit vote hung over Europe like a dark cloud, with EU members wondering who would pull out of the club next. Although Trump and Brexit still remain serious challenges for the EU, fears of a populist wave across the continent have receded, as nationalist parties in the Netherlands and France were handily defeated recent elections. Economic indicators continue to point upwards, as unemployment has dropped and growth is higher. The EU Spring Forecast has forecast Eurozone GDP to rise 1.7% in 2017, and 1.8% in 2018, with growth in the EU expected at 1.9% for both years. Investors have shown their approval by flocking to the euro, which has jumped 6.5% since the start of the year.
