The euro has ticked higher in the Thursday session. Currently, the pair is trading at 1.1350. On the release front, German Factory Orders gained 1.0%, well short of the forecast of 1.9%. Today’s highlight is the minutes from the ECB’s policy meeting in June. In the US, the focus is on employment data, with the release of ADP Nonfarm Payrolls, which are expected to plunge to 184 thousand. We’ll also get a look at unemployment claims and ISM Non-Manufacturing PMI. On Friday, there are three key employment events – Average Hourly Earnings, Non-Farm Employment Change and the unemployment rate. As well, the Federal Reserve will release its semi-annual Monetary Policy Report.
The euro surged last week, after the markets interpreted Mario Draghi’s comments at the ECB forum as a signal that the ECB was planning to wind down its asset-purchase program (QE). The ECB then beat a hasty retreat, saying that the markets had “misjudged” Draghi’s comments. The ECB is back on center stage later on Thursday, with the release of the ECB minutes from the July policy meeting. Will the minutes have the same galvanizing effect on the currency? Investors will be monitoring closely. If there are any hints that the ECB is moving closer to exiting the QE scheme, the euro rally could resume.
The ECB will hold a policy meeting on July 20, but last week’s “Draghi rally”, where the euro soared 2.0%, has meant that policymakers will need to reassess what message it chooses to send to the markets. In June, the bank 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 rate announcement will be followed by a Draghi press conference, but it could well be a case of “once bitten twice shy” for the ECB head after last week’s rally. This could result in the ECB reiterating that the economy is headed in the right direction, but QE will remain in place until inflation levels move higher.
The dollar shrugged off the release of the Fed’s June policy meeting, which didn’t provide any clarity about the Fed’s plans. The minutes pointed to a divided Fed over the key issues of inflation and the Fed’s bloated balance sheet. Some members expressed unease at the Fed’s current forecast of rate hikes, given the persistently low levels of inflation. According to the current “dot plot”, the Fed expects to raise rates in December, and three times in 2018. There was also division over the timing of reducing the $4.2 trillion balance sheet – some policymakers were in favor of starting in September, while others preferred later in the year. At the June meeting, the Fed stated that it would begin reducing the balance sheet this year, but provided no details. Analysts expect the Fed to start winding down the balance sheet in September, prior to a rate hike in December. The markets are lukewarm about a rate hike in December, with the odds at just 50%, according to the CME Group.
