The euro has ticked lower in the Tuesday session. Currently, the pair is trading at 1.1350. On the release front, there are no US events, as markets are off for Independence Day. There are no major events in the eurozone, so traders can expect a quiet day. On the schedule, Spanish Unemployment Change dropped sharply to -98.3 thousand, well below the estimate of -120.3 thousand. Later in the day, we’ll get a look at Eurozone PPI. On Wednesday, the Federal Reserve will publish the minutes of its June policy meeting.
Analysts would be hard pressed to recall a European forum of note, but this year’s gathering of central bankers won’t be forgotten anytime soon. Last week’s meeting in Portugal triggered sharp rises from the euro and British pound, following hawkish remarks from Mario Draghi and Mark Carney. The euro jumped 2.0% last week, surprising the ECB. The bank tried to dampen market speculation about any imminent moves to withdraw stimulus, but the euro remains at high levels. Last week’s stampede to snap up euros has forced ECB policymakers to reassess whether what moves, if any to announce at the July 20 policy meeting. In June, the ECB removed an easing bias regarding interest rates, effectively closing the door to further rate cuts. However, after the Draghi rally last week, policymakers may be wary about removing a second easing bias regarding the asset-purchase program, to avoid another run on the euro. The ECB has repeated loud and clear that it will not remove QE until inflation levels are closer to the bank’s target of 2.0%, but Draghi may have learned the hard way at the ECB forum that the market is picking up a different message than what the ECB thinks it is sending. This could result in the ECB playing it safe and avoiding any meaningful discussion about QE at the July meeting, especially if the euro remains at high levels.
The Federal Reserve has all but signed in writing that it would raise interest rates three times in 2017, but the markets are becoming more skeptical. The odds of a rate hike in December have fallen to 47%, down from 53% last week, according to the CME Group. With the US economy giving a mediocre performance in the first quarter, and inflation levels remains low, there are Fed policymakers who are currently lukewarm to the idea of raising rates again this year. Key economic indicators have not looked particularly sharp in the second quarter, notably housing and consumer spending numbers. If inflation numbers do not improve and GDP reports for Q2 remain soft, the odds of a December hike will drop even further, which could translate into broad losses for the US dollar.
