The euro has posted small gains in the Tuesday session, after starting the week with losses. Currently, EUR/USD is trading at 1.1140. On the release front, German Import Prices declined 0.1%, short of the forecast of +0.2%. Later in the day, Germany releases Preliminary CPI, which is expected to decline 0.1%. In the US, today’s highlight is CB Consumer Confidence, which is expected to remain steady at 120.1 points. On Tuesday, Germany releases Retail Sales and the Eurozone publishes CPI Flash Estimate. The US will release Pending Home Sales.
The markets were all ears on Monday as ECB President Mario Draghi testified before the EU parliamentary committee for economic affairs. Draghi acknowledged that the euro-area economy was improving, but said that inflation and wage growth remained weak, requiring the ECB to continue its asset-purchase program. The scheme is due to wind up in December, and stronger data had raised speculation that the central bank might revisit its monetary stance and perhaps taper the program at the June policy meeting. Draghi’s message remains one of caution, and appears to be putting the markets on notice that any moves in June will likely be of a minor nature.
There were plenty of questions marks about the eurozone economy at the start of 2017. Britain’s vote to leave the European Union stunned and stung Europe, with EU members wondering who would pull out of the club next. The jitters increased as Donald Trump was sworn in as US president, who ran on a protectionist campaign of “America first”. Just four months later, the picture is much brighter for the euro-area. Donald Trump has managed to tussle with German Chancellor Angela Merkel and Brexit remains a serious challenge for the EU, but the political and economic landscape has shifted for the better. Fears of a populist wave across the continent have receded, as nationalist, anti-EU parties failed to win elections in the Netherlands and France. On the economic front, 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 snapping up the euro, which has jumped 6.5% since the start of the year.
The US economy slowed down considerably in the first quarter of 2107, and 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 appear concerned, 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. Political concerns are a serious worry, as the Trump administration is embroiled in scandals, with several congressional investigations probing into Trump’s alleged connections with Russian politicians. A weakened White House raises doubts if Trump will be able to keep his election promises to lower taxes and cut government spending.
