The euro continues to have a quiet week. Currently, the pair is trading at 1.2443, up 0.15% on the day. On the release front, market estimates for German and Eurozone Final Manufacturing PMIs were on the money. The German release came in at 61.1, just shy of the estimate of 61.2 points. The eurozone indicator dipped to 59.6, matching the estimate. In the US, there are two key events. Unemployment claims are expected to rise to 237 thousand, and the markets are expecting ISM Manufacturing PMI to slow to 58.7 points. On Friday, the eurozone releases PPI. In the US, the focus will be on employment reports, with the release of wage growth, nonfarm payrolls and the unemployment rate.
The Federal Reserve held the course on interest rate policy on Wednesday, as expected. In the rate statement, policymakers said that they expected the economy to continue to expand at a moderate pace and that the labor market would remain strong in 2018. What was more noteworthy was that the Fed predicted that inflation would rise to the Fed’s 2 percent target this year. This marks an upgrade in the inflation forecast, as the December statement said that inflation was expected to “remain somewhat below 2 percent.” Higher inflation is likely to open the door to tighter monetary policy, and the Fed appears on track for three, or even four rate hikes in 2018, assuming that the US economy remains strong. This policy meeting was the last under Janet Yellen, as Jerome Powell will take over as Fed chair on February 3. The slightly hawkish tone of the rate statement has raised the odds of a rate hike to 83% when the Fed next meets in March.
Inflation levels in the eurozone pointed upwards in 2017, but softened in January. Eurozone CPI Flash Estimate came in at 1.3%, as inflation remains well below the ECB target of around 2 percent. Lower inflation gives the ECB some breathing room regarding its stimulus program (QE), which is scheduled to terminate in September. A stronger eurozone economy has raised speculation that the ECB could wind up QE and shift to normative policy, and perhaps even raise interest rates. However, ECB policymakers have been cautious, trying to keep in check any market enthusiasm about a major change in policy. Last week, ECB President Mario Draghi went as far as saying that QE could be extended or increased if necessary.
