The euro rally continues, as EUR/USD has posted slight gains in the Friday session. Currently, the pair is trading at 1.2064, up 0.34% on the day. The euro has gained 1.4% this week, and is trading at its highest level since January 2015. On the release front, Germany’s trade surplus narrowed to EUR 19.5 billion, short of the forecast of EUR 20.3 billion. There are no major events in the US, but we’ll hear from FOMC member Patrick Harker.
The euro pushed above the symbolic 1.20 level on Thursday, after investors liked what they heard from ECB President Mario Draghi. As expected, the ECB maintained interest rates at 0.00%, and what investors wanted to hear was some guidance regarding the bank’s asset purchase program (QE), which is scheduled to end in December. The ECB announcement was surprisingly dovish, as policymakers said that QE would not be tapered before December, and left the door open to further stimulus in 2018, if necessary. However, Mario Draghi presented a more hawkish stance in his follow-up press conference, saying that the ECB would decide on tapering stimulus in October. Draghi made direct reference to the exchange rate, noting that “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring”. Draghi & Co. are clearly concerned by the euro’s appreciation, as the EUR/USD has soared 14 percent in 2017. The stronger euro has made imports less expensive, thus reducing inflation and hampering the ECB’s efforts to raise inflation levels. The ECB has now cut its inflation forecast to 1.2 percent in 2018 and 1.5 percent in 2019, well short of its target of just below 2 percent.
The markets have grown used to solid German numbers, so this week’s numbers have been a disappointment. Earlier this week, Factory Orders declined 0.7%, well off the forecast of a 0.2% gain. This marked a 3-month low. German Industrial Production followed suit, as the reading of 0.0% missed the estimate of 0.5%. On Friday, Germany’s trade surplus dropped to EUR 19.5 billion, the smallest surplus since January. Why the downturn? Global demand, which had been very strong in the first half of 2017, is showing signs of softening, and this had a negative impact on the manufacturing sectors in Germany and throughout the eurozone. This has also had a negative impact on exports, which was reflected in the Germany’s smaller surplus in July.
