The euro is showing little movement in the Friday session. Currently, the pair is trading slightly above the 1.14 level. On the release front, German Industrial Production gained 1.2%, crushing the estimate of 0.2%. In the US, the week wraps up with key employment events. Average Hourly Earnings is expected to edge up to 0.3%, and Nonfarm Payrolls is forecast to jump to 175 thousand. As well, the Federal Reserve will release its semi-annual Monetary Policy Report.
The ECB released the minutes of its June meeting on Thursday, and the euro responded with gains, as the ECB mulled policy adjustments. Policymakers discussed removing its ‘easing bias’ at the June meeting, but ultimately decided not to make a move, since stronger economic conditions had not resulted in higher inflation. At the same time, minutes were cautious in tone, noting that ‘it was necessary to avoid signals that could trigger a premature tightening of financial conditions’. The minutes come after comments from ECB President Mario Draghi last week, who said that the eurozone growth was broadly distributed and that factors keeping inflation down were temporary. The markets jumped on his remarks, as speculation rose that the ECB was preparing to taper its stimulus program. Draghi’s message did not seem to veer away from ECB policy, but the markets clearly thought otherwise. As well, ECB chief economist Peter Praet reiterated the bank’s stance at a conference in Paris. Praet noted that eurozone economic growth is accelerating, but said that the ECB still needs to provide a ‘steady hand’ in order to spur stubbornly low inflation levels. Next stop for the ECB is the July policy meeting. In June, the bank removed an easing bias towards lowering interest rates. However, policymakers may now be wary about sending more signals of tightening policy, so as to avoid another run on the euro. The ECB doesn’t want the rate statement to shake up markets, so we could see a bland statement, to the effect 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.
