EUR/USD has edged lower in the Tuesday session. Currently, the pair is trading at 1.0640. On the release front, German Final CPI improved to 0.6%, matching the forecast. German ZEW Economic Sentiment improved to 12.8 points, short of the estimate of 13.2 points. The Eurozone ZEW Economic Sentiment jumped to 25.6, beating the forecast of 19.3 points. In the US, we’ll get a look at PPI, with the index expected to post a small gain of 0.1%. Wednesday promises to be very busy, with the US releasing CPI and retail sales reports. As well, the Federal Reserve is widely expected to raise the benchmark rate to 0.75 percent.
German data was in the spotlight on Tuesday. There was further indication that inflation continues to improve, as Final CPI rebounded with a gain of 0.6%, compared to a 0.6% decline a month earlier. The well-respected ZEW Economic Sentiment report improved to 1.28, although the markets had expected a stronger reading. Eurozone ZEW Economic Sentiment climbed to 25.6, its strongest gain since December 2015.
The euro posted considerable gains on Friday, as some ECB policymakers raised the possibility of higher interest rates at last week’s policy meeting. At the meeting, the ECB held course and maintained interest rates at a flat 0.00%. The markets were left to pick up on nuances, as ECB President Mario Draghi noted that the central bank removed one phrase from its standard introductory statement – ‘using all the instruments available within its mandate’. Draghi stated that the removal of this phrase means that the ECB ‘no longer has a sense of urgency in taking further actions …. prompted by the risk of deflation’. With growth and inflation showing signs of improvement, the ECB has been under pressure to tighten policy and reduce its asset-purchase program. Germany, in particular, is unhappy with the ECB’s ultra-loose policy and on Thursday, German Finance Minister Wolfgang Schaeuble bluntly stated that he wanted to see a ‘timely start to the exit’ from the ECB’s asset-purchase scheme. For his part, Mario Draghi must balance the improved economy with upcoming elections in the Netherlands and France. Euro-skeptics are a strong force throughout Europe and Draghi is reluctant to make any major moves in the middle of heated political campaigns.
More job numbers out of the US, more good news for the economy. Nonfarm payrolls sparkled in February, as the indicator jumped to 235 thousand, easily beating the estimate of 196 thousand. Wage growth climbed 2.6% compared to February 2016, while the participation rate edged up to 63.0%, up from 62.9%. These numbers make it a virtual certainty that the Fed will raise rates by a quarter-point on Wednesday. Although a rate hike has been priced in by the markets, there have been disappointments in the past, so a rate move will likely give the dollar a boost against its major rivals, such as the euro. The solid job numbers also give President Trump a much-needed boost. Trump is under pressure to present an economic agenda, but the markets won’t mind giving him some additional breathing room with the economy performing well.
