The euro has posted gains for a third straight day, as the pair is up 0.32% in the Thursday session. In Germany, GfK Consumer Climate improved to 10.6, beating the estimate of 10.4. Later in the day, Germany releases Preliminary CPI, with an estimate of a flat 0.0%. In the US, Final GDP is expected to gain 1.2%, while unemployment claims are forecast to remain at 241 thousand. On Friday, Germany releases Retail Sales and the eurozone publishes CPI Flash Estimate. The US will publish UoM Consumer Sentiment.
The Draghi rally continues on Thursday, as the euro has punched past the 1.14 level for the first time since June 2016. The euro has jumped 1.9% this week, buoyed by hawkish comments by ECB President Mario Draghi at the ECB forum in Portugal. Draghi presented an optimistic view of the euro-area, saying that the recovery was broad and shrugged off weak inflation levels. Draghi said that the ECB’s stimulus program was needed for now, but would be gradually withdrawn once inflation moved higher. Draghi’s comments did not appear to be a major change from previous statements, but the markets thought otherwise, as speculation rose that the ECB was planning to tighten policy. After the euro jumped, the ECB beat a hasty retreat, as sources said that the markets had “misinterpreted” Draghi’s remarks. This impeded the euro’s rally, but only briefly. The ECB has consistently said that it would not reduce stimulus until inflation moves closer to the ECB’s target of 2%, but the message the markets appear to have heard is that the long war on inflation has been won, so it’s only a matter of time before the ECB wraps up its monetary stimulus. Unless Draghi does more to convince the markets that they have indeed overreacted, the euro rally could continue.
Investors are casting a nervous glance at Thursday, as the US releases Final GDP for the first quarter. The economy is expected to grow 1.2%, but there are worrying signs that the economy might miss this target. Recent economic data has been softer than expected, notably construction and manufacturing reports. US durable goods releases were weak in May. Core Durable Goods broke a streak of two straight declines, but the weak gain of 0.1% missed expectations. Durable Goods declined 1.1%, its sharpest decline since June 2016. The slowdown in orders of business equipment could weigh on second quarter growth. Last week, it was the turn of construction numbers to disappoint, as Housing Starts and Building Permits both missed expectations. Consumer spending has also been softer than expected, and if Final GDP falls short of the modest estimate of 1.2%, the dollar could respond with losses.