The euro has posted slight losses in the Friday session. Currently, the pair is trading at the 1.14 level. On the release front, it’s a busy day, so traders should be prepared for some movement from EUR/USD. German economic indicators were mixed. Retail Sales rebounded in May, with a gain of 0.5%. However, Unemployment Change climbed 7 thousand, missing the estimate of -10 thousand. On the inflation front, Eurozone CPI Flash Estimate edged lower to 1.3%, above the forecast of 1.2%. In the US, the focus will be on consumer data, with the release of Personal Spending and UoM Consumer Sentiment.
The quiet town of Sintra, Portugal was in the spotlight this week, as comments from central bankers at the ECB forum shook up the currency markets. The euro and British pound both enjoyed sharp gains against the dollar, courtesy of ECB President Mario Draghi and BoE Governor Mark Carney. Draghi presented an optimistic view of the eurozone economy, and put a positive spin on inflation, stating that ‘deflationary forces have been replaced by reflationary ones’. Draghi said that the ECB’s stimulus program was needed for now, but would be gradually withdrawn once inflation moved higher. The markets read Draghi’s comments as a declaration that the ECB was planning to tighten policy. After the euro jumped, the ECB beat a hasty retreat, with ECB sources saying that the markets had ‘misinterpreted’ Draghi’s remarks. This impeded the euro’s rally, but only briefly. There was a similar reaction from the pound, which jumped above the 1.30 level for the first time since May after Carney left the door open for a rate hike. Carney appeared to backtrack from remarks last week, when he warned against rate increases in the near future. This week’s rallies by the euro and the pound were extraordinary, as Stephen Innes, senior trader at OANDA, summed up:
‘A game changer of a week as hawkish central bank commentary steamrolled the markets’… traders are now contemplating who will be next to join the lineup. No one wants to miss out on this party realising there’s a co-ordinated policy shift afoot and the chance to catch the removal of an easing bias is far too seductive for traders to ignore.’
There was no getting around the fact that the US economy slowed down in the first quarter, but there was some good news, as the revised GDP reading was raised to 1.4%, better than the initial estimate of 1.2% in May. The improvement was attributed to stronger consumer spending and an increase in exports. Earlier in the year, the markets were braced for a very poor quarter, with the first estimate in April projecting a gain of only 0.7%. Will we see better numbers in the second quarter? That may be a tall order, as consumer spending and manufacturing numbers in Q2 have missed expectations. Housing numbers have been mixed, and inflation remains below the Fed’s target of 2 percent. At the same time, the US labor markets remains very tight, with the unemployment rate at a 16-year low of 4.3%. Stronger global economic conditions have increased the demand for US products, boosting the export sector.
Aside from lukewarm economic data in 2017, investor confidence has been dampened by a Trump administration which has been plagued by scandals and crises. The administration continues to spend much of its time and energy on damage control, rather than focusing on its agenda of tax reform and increased fiscal spending. Will political paralysis in Washington affect interest rate policy? The Federal Reserve has all but promised one more rate hike in 2017, but the markets aren’t so sure, with the odds of a December rate hike at 57%, according to the CME Group.
