The euro has recorded gains on Tuesday. Currently, EUR/USD is trading at 1.1781, up 0.34% on the day. On the release front, Germany’s trade surplus climbed to EUR 21.6 billion, above the forecast of EUR 19.8 billion. French Industrial Production declined 0.3%, missing the forecast of a 04% gain. There are no major events out of the US. On Wednesday, the US releases JOLTS Job Openings and the Federal Reserve releases the minutes of the September policy meeting.
The Catalan constitutional crisis is going down to the wire, as it remains unclear whether Catalan President Carles Puigdemont will unilaterally declare independence from Spain, after Catalonians voted in favor of independence. The national government has refused to negotiate with the Puigdemont about session, and on Sunday, a demonstration against the referendum attracted some 350,000 people, in a show of support for the Spanish government. If Puigdemont declares independence, Spanish Prime Minister Mariano Rajo has promised to take drastic action, which could include dissolving the Catalan parliament. Investors are casting a nervous eye on the economic ramifications of the crisis. Two major banks, Caixabank and Sabadell, as well as several large corporations have announced that they are relocating their legal headquarters from Barcelona to Madrid. The tensions have not affected the euro so far, but that could change if Catalonia defies Madrid and declares independence.
The Federal Reserve did not raise rates at the September meeting, but the markets are clearly expecting one final rate hike in December. According to CME FedWatch, the odds of a December rate hike are currently at 86%, compared to just 31% a month ago. Why the huge turnaround? A strong US economy has helped raise the odds, but the primary reason for the huge shift in market sentiment can be attributed to the Fed policymakers that have come out in support of a rate hike, notably Fed Chair Janet Yellen. The lack of inflation remains the most significant impediment to raising rates, but Yellen and other FOMC members have insisted that strong economic conditions will lead to higher inflation levels. Even if inflation does not move higher before 2018, the Fed now appears ready to press the rate trigger.
