The euro has posted gains in the Tuesday session. Currently, EUR/USD is trading at 1.1560. On the release front, German ZEW Economic Sentiment dropped to 17.5, short of the estimate of 17.8 points. The Eurozone ZEW Economic Sentiment also softened, coming in at 35.6 points. This reading missed the forecast of 37.2 points. There are no major US events on the schedule. On Wednesday, the focus will be on construction data, with the release of Building Permits and Housing Starts.
The euro has pushed above the 1.15 line and is trading at its highest levels since May 2016. The currency received a boost on Tuesday, following the news that the Republicans will not attempt to advance their health care proposal before Congress takes a recess in August. This decision is a major setback to President Trump, who has tried to pass a health care bill which would replace Obamacare, but opposition from some Republican lawmakers has meant that the White House does not have the votes to pass such a bill. Despite Republican control of both houses of Congress, no major legislation has been passed since Trump took over as president 6 months ago. There is growing skepticism as to whether Trump will be able to convince Congress to pass other key parts of his agenda – tax reform and fiscal spending.
Inflation levels in the US have been stubbornly low, despite a generally strong economy and a tight labor market. Still, the Federal Reserve remains convinced that it’s only a matter of time before inflation levels move higher. This stance was reiterated by Fed Chair Janet Yellen last week, as she testified before congressional and senate committees. With the labor market close to capacity and the unemployment rate at just 4.4%, economists are puzzled why this hasn’t translated into higher inflation. In her testimony, Yellen admitted that the Fed was at a loss to explain the lack of inflation, but insisted that it was “premature to conclude that the underlying inflation trend is falling well short of 2 percent”, and that with a strong labor market “the conditions are in place for inflation to move up”. Is Yellen’s argument just wishful thinking? The markets aren’t buying in, with a rate hike considered extremely unlikely in September. As for a December increase, the odds are currently at just 47%, according to the CME Group. Consumer spending and inflation numbers were soft in June, and the disappointing numbers will do little to improve market skepticism about one last rate hike this year.
