EUR/USD has ticked lower in the Thursday session. Currently, the pair is trading at 1.1850, down 0.09% on the day. On the release front, German Final Services PMI dipped to 53.1, short of the estimate of 53.5 points. Eurozone Final Services was stronger, which matched the estimate with a reading of 55.4 points. Eurozone Retail Sales edged up to 0.5%, beating the forecast of 0.0%. In the US, there are two key releases. Unemployment Claims is expected at 242 thousand, and the ISM Non-Manufacturing PMI is forecast to slow to 56.9 points. On Friday, the US releases wage growth and non-farm payrolls, so traders should be prepared for some movement from EUR/USD.
The ECB continues to stick with its ultra-accommodative monetary policy, and with the euro-area struggling with weak inflation, no changes are expected in the next few months. Currently, ECB interest rates stand at a flat 0.00%, where they have been pegged since March 2o16. Under the bank’s quantitative easing program (QE), the bank has been purchasing assets at a rate of EUR 60 billion/month. The QE program is scheduled to wind up in December, although the ECB has provided itself with some wiggle room, saying that that it could extend the program ‘if necessary’. With the eurozone economy finally flexing some muscle in 2017, there has speculation that the ECB would tighten policy, and this has led to some frenzied buying of euros, much to the consternation of the ECB. At a conference of central bankers in June, ECB President Mario Draghi said that the reflationary forces could result in the bank ‘adjusting the parameters’ of current stimulus. The comments did not appear to mark a change in ECB policy, but investors seized on the remarks and the euro soared. The ECB was caught off guard, and resorted to the unusual step of stating that the markets had misinterpreted Draghi’s comments. Given that fiasco, it’s a safe bet that the ECB will be ultra-cautious in upcoming statements in order to avoid any repeat convulsions in the markets. At the same time, as we approach the December timeline for winding up QE, the ECB would do well to act in a transparent fashion and let the markets know if the QE program will indeed wind up in December. A lack of transparency could trigger market volatility, which is precisely what ECB policymakers wish to avoid.
With the Federal Reserve unlikely to raise rates before December, investor attention has shifted to the Fed’s balance sheet, which stands at $4.2 trillion. Fed policymakers have broadly hinted at reducing purchases of bonds and securities starting in September, but San Francisco Fed President John Williams was more forthcoming about the Fed’s plans, likely aimed at giving notice to the markets. In a speech on Wednesday, Williams said that the economy had ‘fully recovered’ from the 2008 financial crisis and called on the Fed to start trimming the balance sheet ‘this fall’. Williams added that the process would be gradual and would take four years to reduce the balance sheet to a ‘reasonable size’. On Wednesday, two other FOMC members also came out in support of starting to taper the balance sheet – St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester.
