The euro has steadied on Thursday, after three straight losing concessions. Currently, EUR/USD is trading at 1.1755, up 0.15% on the day. On the release front, German GfK Consumer Climate edged lower to 10.8, shy of the estimate of 11.0 points. Later in the day, Germany releases Preliminary CPI, which is expected to remain unchanged at 0.1%. In the US, all eyes will be on Final GDP, with a forecast of 3.0%. As well, unemployment claims are forecast to jump to 269 thousand. On Friday, Germany releases Retail Sales, while the eurozone will publish CPI Flash Estimate. The US will release Personal Spending and UoM Consumer Sentiment.
German President Angela Merkel finds herself with a weaker hand following last week’s election, and she will likely have to make major concessions in order to form a coalition government. The most likely coalition is Merkel’s CDU, the pro-business FDP and the Greens. This is uncharted political territory, as Germany hasn’t had a 3-party coalition since the 1950s. However, Merkel, an experienced and astute politician, hasn’t wasted any time, and has already appointed her former finance minister, Wolfgang Schaeuble to president of parliament. This move clears the path for the FDP to join, as the party has insisted on the finance portfolio. The FDP is fiscally hawkish and against Germany continuing to finance weaker eurozone members, such as Greece. If the FDP does take part in the government, Merkel may have to shift away from her plans to further integrate the European Union.
What can we expect from the Federal Reserve with regard to interest rate policy? Fed policymakers remain divided on the hot issue of a third and final rate hike in 2017. Fed Chair Janet Yellen waded into the rate debate on Tuesday, as she sent out a surprisingly hawkish message to the markets. Yellen said that she favored gradual rate increases, and voiced confidence that inflation levels would move higher. She added that if the Federal Reserve did not continue to raise rates, the red-hot labor market could become overheated, potentially causing a recession. Yellen appeared to echo sentiments voiced by New York Fed President William Dudley, who made a strong case for raising rates on Monday. Dudley cited a soft US dollar and strong global growth as reasons why inflation would increase and also translate into stronger wage growth. Dudley said he expects inflation to reach the Fed’s target of 2 percent in the “medium term”, and predicted that the Fed would continue to gradually remove monetary accommodation. However, Chicago Fed President Charles Evans sent out a very different message, calling on the Fed to avoid another rate hike until wage and inflation levels moved higher. Evans said that inflation, which is running at around 1.4 percent, is too low, and wants to see “clear signs” that prices are moving higher before the Fed presses the rate trigger. For their part, the markets are more confident in a December move – the CME Group has pegged the odds of a December raise at 81%, while the odds were mired below 50% just a few weeks ago.
