The euro has ticked higher in the Friday session. Currently, EUR/USD is trading just above the 1.14 level. On the release front, the eurozone trade surplus edged up to EUR 19.7 billion, falling short of EUR 20.3 billion. The US will release CPI and retail sales, with both indicators expected to post a weak gain of 0.1%.
Germany may be the catalyst of the eurozone’s economic recovery, but the bloc’s largest economy has not been immune to low inflation. Final CPI improved to 0.2% in June, compared to -0.2% in May. CPI has managed just one reading above 0.2% in 2017, and earlier in the week, WPI came in at 0.0%. German and eurozone inflation levels remain well below the ECB’s target of 2%, and with no indication that inflation levels will move higher anytime soon, the cautious ECB is unlikely to taper its aggressive stimulus package.
The US economy has slowed in 2017, with GDP in the first quarter of 1.4%. Despite a labor market that remains close to capacity, consumer spending has not kept up. Wage growth remains weak, and inflation levels are well below the Fed’s target of 2 percent. Later on Friday, the markets will get a look at consumer spending and inflation indicators. The markets are expecting weak gains, which could disappoint investors and hurt the US dollar.
Janet Yellen’s testimony on Capitol Hill this week was cautious and the markets didn’t show much reaction to her comments. Yellen’s message didn’t veer from what the markets have already heard from other Fed policy makers. Yellen reiterated that the Fed planned to raise rates “gradually”, and added that the Fed would begin trimming its balance sheet before the end of the year. The Fed chair didn’t provide any timelines, but the most likely timelines are September for a balance sheet reduction, with a rate hike to follow in December. However, despite Yellen’s assurances, the markets remain lukewarm about a rate hike before the end of the year. Investors are concerned that the US economy has slowed down in 2017 and may not need another rate hike. In her testimony before a congressional committee, Yellen reiterated said that she believes the factors weighing on inflation are temporary. However, she acknowledged that with inflation well below the Fed’s target of 2%, “there could be more going on there”. Early in the year, the Fed all but signed on the dotted line that it would raise rates three times in 2017, but a third rate hike has become a serious question mark, with the odds of a December hike continuing to dip. According to the CME Group, the current odds for a December increase are just 43%.
