EUR/USD has lost ground at the start of the trading week. Currently, the pair is trading at 1.1477, down -0.39% on the day. There are no U.S events on the schedule, as U.S banks are closed for Columbus Day (however, stock markets are open). On the release front, German Industrial Production declined 0.3%, missing the estimate of 0.4%. The indicator has now declined four times in the past five months. In the eurozone, Sentix Investor Confidence dropped to 11.4 points, matching the estimate. On Tuesday, Germany releases trade balance.
In the U.S, the labor market remains hot, but September’s numbers were mixed. Nonfarm payrolls dropped sharply to 134 thousand, its smallest gain in a year. This was well short of the estimate of 185 thousand. However, one factor in the disappointing release is Hurricane Florence, which led to many employees being unable to report to work during the storm. Wages appear headed in the right direction – Average Hourly Earnings gained 0.3% in September, and are up 2.9% on a year-to-year basis. The unemployment rate fell to 3.7%, its lowest level since 1969. The mixed numbers put a slight damper on the odds of a December hike, which dipped to 76% after the job releases, down from 80% prior to the releases. A December rate hike would be the fourth this year, with the Fed expected to raise rates another three times in 2019.
Fed Chair Jerome Powell had a hawkish message for the markets last week. Powell said that interest rates were still accommodative, but were “gradually moving to a place where they will be neutral”. Powell said that extremely accommodative low interest rates were no longer needed, since the economy has strengthened. The hawkish comments helped push the U.S dollar higher on Wednesday. Analysts have noted that there is no precise definition of a neutral rate, but the Fed tends to use the 3 percent level as its yardstick. With the Fed expected to continue its gradual increase in rates, this level could be reached in 2019.
