The euro has posted slight gains in the Tuesday session. Currently, EUR/USD is trading at 1.1993, up 0.32% on the day. Earlier in the day, the pair punched above the symbolic 1.20 level. On the release front, German ZEW Economic Sentiment climbed to 17.0 points, easily beating the forecast of 12.3 points. Eurozone ZEW Economic Sentiment improved to 31.7, but fell short of the estimate of 32.4 points. The US will release two key housing events – Building Permits and Housing Starts. On Wednesday, the Federal Reserve winds up its policy meeting and will release a rate statement.
The German economy continues to look strong, and institutional investors and analysts like what they see. German ZEW Economic Sentiment, jumped to 17.1 points in September, rebounding from a weak reading of 10.0 in August. The ZEW report noted that growth in the second quarter remained strong, and both the public and private sectors were marked by increased investment. As well, global demand remained steady, and a stronger euro had not had a negative impact on the German economy.
The eurozone economy has rebounded in 2017, and much of the credit goes to Germany, the largest economy in the bloc. At the same time, inflation levels have been stubbornly low. This has complicated the ECB’s plans to reduce its quantitative easing scheme (QE), although ECB President Mario Draghi has said that the ECB will announce its plans to reduce QE at the October policy meeting. QE is scheduled to end in December, and policymakers will have to balance opposing interests as to what happens next. Germany, with its robust economy, would like to remove stimulus entirely, while less affluent eurozone members want to retain an accommodative monetary policy. We’re likely to see some compromise, in which stimulus is extended into 2018, but will be tapered from its current level of EUR 60 billion/month.
The Federal Reserve will be back in the spotlight on Wednesday. There is virtually no chance that the benchmark rate of 1.25% will change, so the markets are focusing on the Fed’s bloated balance sheet, which currently stands at $4.2 trillion. Earlier in the year, the Fed outlined plans to reduce the balance sheet by not replacing some maturing bonds, starting at $10 billion/month, and gradually moving higher. This move can be viewed as a mini-rate hike, and could provide a boost for the US dollar against major rivals, such as the euro. The Fed is still debating whether it will raise rates in December, as persistently low inflation has hampered plans for a third rate hike in 2017. However, the odds of a December increase have been moving higher in September, and are currently at 56%.
