The euro has inched higher in the Friday session, as EUR/USD is currently trading at 1.1220. On the release front, the sole eurozone event is Spanish Unemployment Change, which posted a strong drop of 111.9 thousand, slightly better than expectations. In the US, the spotlight remains on employment data, highlighted by Nonfarm Payrolls. The markets are braced for a sharp drop in May, with a forecast of 181 thousand. We’ll also get a look at wage growth, which is expected to dip to 0.2%, and the unemployment rate, which is forecast to remain unchanged at 4.4 percent.
As the eurozone’s largest economy, a strong and reliable German economy has been instrumental in the eurozone’s impressive improvement in the first quarter of 2017. However, retail sales, the primary gauge of consumer spending, has raised concerns with some soft numbers in recent months. In April, retail sales declined 0.2%, compared to a forecast of +0.4%. This marked the third decline in 2017, further contraction in the second quarter could unnerve investor confidence in the German economy and weigh on the euro. Although the German labor market remains strong, this has not translated into higher inflation, which declined 0.2% in May, after a flat reading of 0.0% in April.
With less than two weeks to go before the Federal Reserve’s rate decision on June 14, the markets are ever-more confident that the Fed will press the rate trigger for the second time this year. The odds of a quarter-point rate hike continue to rise, and according to the CME Group, currently stand at 91 percent. The Fed remains concerned about low levels of inflation, which remain stubbornly low, despite a labor market that remains close to capacity. Janet Yellen & Co. are also scratching their heads over soft consumer spending, which has not kept pace with high levels of consumer confidence. As for additional rate hikes in the second half of 2017, the markets are much more skeptical, as the heady predictions that the Fed could raise rates up to four times this year have faded considerably.
