The euro has inched lower in the Wednesday session. Currently, EUR/USD is trading at 1.1630. down 0.14% on the day. On the release front, there are no events out of the eurozone. In the US, the Federal Reserve releases its rate statement and is expected to maintain the benchmark at 1.25%. As well, the US releases New Home Sales, which is expected to rise to 615 thousand. On Thursday, the US will release two key indicators – Unemployment Claims and Core Durable Goods Orders.
As the German economy continues to fire on all cylinders, economic indicators are pointing upwards. German Ifo Business Climate impressed in July, as the indicator strengthened for a sixth straight month. The indicator hit another record high of 116.0, surprising the markets which had forecast a small drop from the previous reading. Clements Fuest, president of the Ifo Institute, continues to use superlatives to describe the German economy, calling sentiment in the business sector “euphoric”. Fuest added that optimism in the business sector is at its highest since Germany’s reunification. Germany’s robust economy has been the locomotive behind a reinvigorated eurozone economy, as growth improves and unemployment drops. The marked improvement in economic conditions in the eurozone has sent the euro soaring, as the currency is up 9.8% since March 1.
All eyes are on the Federal Reserve, which will issue a rate statement later on Wednesday. The markets are not expecting the Fed to raise rates, but analysts will be looking for any references to the “I” word. Inflation continues to hover around 1.4% (based on the Fed’s calculations), well below the Fed target of 2%. In June, Janet Yellen described low inflation as “transitory”, but recent comments from Yellen and other policymakers have shifted in tone, an apparent acknowledgment that inflation may remain at low levels. This has raised doubts as to whether the Fed will indeed raise rates on more time this year. No move is expected before December, and the odds of a December hike have fallen to just 37%, according to the CME Group. If today’s rate statement fails to reassure the markets that a December hike is planned, investors could respond by selling dollar-denominated assets in favor of other currencies or gold.
Another issue facing Fed members is that of the Fed’s $4.2 trillion bond portfolio, a result of the aggressive quantitative easing program which was put in place after the financial crisis in 2008. In June, the Fed outlined plans to reduce its bloated balance sheet, with experts circling September as the start date of the reduction. This would involve the Fed tapering the purchases of Treasury bonds and mortgage securities, with an initial taper likely of $10 billion/month. Analysts expect the taper to begin in September, so we could see the Fed make reference to this in the July statement.
