The euro is almost unchanged in the Thursday session, after gains on Wednesday. Currently, EUR/USD is trading at 1.1811, down 0.02% on the day. On the release front, German GfK Consumer Climate edged lower to 10.7, close to the forecast of 10.8 points. The ECB will release its rate statement, and is expected to taper its asset purchase program. There are two key indicators in the US – unemployment claims and Pending Home Sales. On Friday, the US releases Advance GDP and the UoM Consumer Sentiment.
All eyes are on the ECB, which holds a policy meeting on Thursday. The Bank is expected to maintain interest rates at a flat 0.00%, but could significantly trim the ECB’s asset purchase program (QE). Currently, the ECB is purchasing EUR 60 billion/mth, and there is a strong likelihood that this amount will drop to EUR 30 billion/mth. The stronger eurozone economy is the catalyst behind a taper, but with inflation persistently at low levels, the ECB is expected to announce to extend the program well into 2018 or even later. Eurozone members remain divided as to whether the ECB should signal that it plans to wind up QE. Germany and the Netherlands are in favor of a quick exit, but other members want the scheme to remain open-ended, so that the ECB can continue with extensions, if needed. ECB policymakers will need to perform a balancing act between these views as it shifts its monetary policy.
The temperature is quickly rising in Spain, as the crisis over Catalan independence is at a fever pitch. On Friday, the Spanish Senate is expected to authorize the central government to invoke Article 155 of Spain’s constitution and apply direct rule over Catalonia. This would allow Madrid to dismiss the Catalan government and take control of the regional police and radio and television stations. This drastic clause has never been invoked, and it remains unclear what steps the central government will take under Article 155. How will the Catalan parliament respond? On Thursday, the Catalan vice-president warned that if Madrid imposed direct rule, the Catalan government would have no choice but to declare independence. So far, the crisis has not affected the euro, and Caixabank, the third largest bank in the country, does not expect the Catalonia issue to affect Spain’s GDP, which the bank projects will expand 2.7 percent in 2018.
