The euro has dropped for a third straight session, as the pair has edged lower in the Wednesday session. Currently, the pair is trading at 1.1330. On the release front, German and Eurozone Services PMIs in June both beat their estimates, but were weaker than the May reports. In the US, the Federal Reserve will release the minutes of the June policy meeting. On Thursday, the ECB will release the minutes of its most recent meeting. It will be busy in the US, with the release of ADP Nonfarm Payrolls, unemployment claims, and the ISM Non-Manufacturing PMI.
Last week’s ECB forum triggered a stampede to snap up euros, as the currency jumped 2.0%, following hawkish remarks from ECB President Mario Draghi. At the meeting, Draghi sounded upbeat about the euro-area economy and played down concerns about low inflation levels. Draghi did not say that the ECB was changing its accommodative policy, but he may have learned the hard way that the markets picked up a different message than the one he delivered in his speech. The euro rally has forced ECB policymakers to reassess whether what moves, if any, it will 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, policymakers may now 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 the markets chose to interpret Draghi’s comments as a signal the the bank was planning an exit from its easing stance. 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.
Federal Reserve policymakers have consistently said that they expect a third rate hike in 2017, but the markets are not convinced. The odds of a December rate hike are pegged at 50%, while the likelihood of an increase in September is just 18%. Consumer spending, which comprises two-thirds of US economic growth, remains soft. Another sore point in the economy is inflation, which remains below the Fed’s target of 2%. In June, Fed Chair Janet Yellen shrugged off inflation worries, saying that she expected inflation to remain soft due to temporary factors. The dollar was broadly higher after the June rate statement, as Fed policymakers were surprisingly upbeat about the economy and dismissed concerns about low inflation levels. The minutes could follow suit with a positive view of the economy, but the question remains as to whether the markets will buy in to the Fed’s optimism. If the answer is yes, then the dollar could respond with gains.
