The euro has started the week almost unchanged, as the currency remains above the 1.20 line in the Monday session. Currently, the pair is trading at 1.2024, down 0.09% on the day. On the release front, the sole Eurozone indicator was Italian Industrial Production, which posted a gain of 0.1%, above the estimate of -0.5%. There are no US events on the schedule. On Tuesday, the US releases JOLTS Job Openings, which is expected to slow to 5.96 million.
The markets have become spoiled, expecting the robust German economy to continue producing sharp readings. However, German data disappointed last week, as manufacturing numbers and the trade surplus disappointed. The week started with 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, marking 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 has taken at toll on the export sector, which was reflected in the Germany’s smaller surplus in July. We could be in for some more soft German numbers on Tuesday – Final CPI is expected to slow to 0.1% in August, compared to a 0.4% gain in July.
Last week’s highly anticipated ECB policy meeting last week didn’t shake up the markets, but policymakers appeared to send mixed signals about the bank’s quantitative easing (QE) program, which ends in December. Currently, the bank is purchasing EUR 60 billion/month and the markets were hoping for some guidance about the ECB’s monetary policy plans. The rate 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 make a decision on how to scale back stimulus in October. In his remarks, 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 with zero interest rates and the ultra-accommodative QE scheme. Despite an improved eurozone economy, 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. It is unclear what the ECB has planned when QE runs out, and the markets will be listening closely for any hints from policymakers.
