EUR/USD has steadied on Friday, after posting considerable losses in two straight sessions. Currently, the pair is trading at 1.1447, down 0.04% on the day. It’s a quiet end to the week, with no key releases on the schedule. The eurozone current account surplus widened from EUR 21.3 billion to 23.9 billion. This easily beat the estimate of EUR 21.4 billion. In the U.S, Existing Home Sales is expected to drop to 5.29 million.
Italy’s draft budget has become a major headache for EU officials, and the crisis could escalate. The budget, which boosts public spending and cuts taxes, would raise the country’s deficit, which breaches EU rules. The government has sent the budget for approval to the European Union. On Thursday, the European Commission told Italy that the budget was not acceptable, and demanded a reply by Monday. This could put Rome and Brussels on a collision course, and the sour mood has sent Italian bond prices higher. The yield on 10-year Italian bonds stands at 3.73%, some 3.33% over the equivalent German bonds, as the gap between the two continues to widen. Bond prices in Spain, Portugal and Greece have also increased, making investors nervous. Italy’s debt stands at an astounding 132% of GDP, and there is a real risk that the country’s financial woes could destabilize the entire eurozone.
The Federal Reserve minutes from the September meeting showed that a majority of members want to continue raising interest rates until the U.S economy shows signs of slowing down. However, the duration of a tighter policy remains unclear, as the minutes noted that “there is considerable uncertainty surrounding all estimates of the neutral federal funds rate.” This would likely be around the 3 percent level, which will not be reached until the second half of 2019, as the Fed has indicated it will raise rates three times next year. At the September meeting, the Fed removed the phrase “the stance of monetary policy remains accommodative”, which was considered outdated, given the policy of steady rate hikes. As rates approach the “neutral rate”, we could see further changes in language at upcoming policy meetings.
