HomeContributorsFundamental AnalysisEuro Ticks Lower As German, Eurozone Mfg. PMIs Meet Expectations

Euro Ticks Lower As German, Eurozone Mfg. PMIs Meet Expectations

The euro has posted small losses in the Thursday session. Currently, EUR/USD is trading at 1.1220. On the release front, German and the Eurozone Manufacturing PMIs both indicated expansion. German Manufacturing PMI improved to 59.4, a shade under the estimate of 59.5. The Eurozone report rose to 57.0, matching the forecast. The US will release ISM Manufacturing PMI. Employment data is in the spotlight for the remainder of the week. Thursday’s releases include ADP Nonfarm Payrolls and unemployment claims. On Friday, we’ll get a look at the official Nonfarm Employment Change, which is expected to drop to 186 thousand. The US will also release wage growth and the unemployment rate.

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.

Is the German locomotive slowing down? As the eurozone’s largest economy, a strong and reliable German economy has been instrumental in the eurozone’s impressive improvement in the first quarter of 2017. However, the latest consumer spending numbers disappointed the markets. In April, retail sales declined 0.2%, compared to a forecast of +0.4%. This marked the third decline in 2017, and if there is further contraction in the second quarter, the eurozone economy could be in trouble. Although the German labor market remains strong, this has not translated into higher inflation, which declined 0.2% in May, after a flat reading of 0.0% in April.

The US economy expanded at an annual rate of 1.2% in the first quarter, 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 off 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. 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 uncertainty remains a serious concern, 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.

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