EUR/USD has inched higher in the Friday session. Currently, the pair is trading at 1.1880, up 0.10% on the day. On the release front, German Factory Orders climbed 1.0%, beating the estimate of 0.6%. Eurozone Retail PMI slowed to 51.0, marking a 4-month low. In the US, the focus will be on employment data. Nonfarm Payrolls is expected to slow to 182 thousand, while wage growth is forecast to edge up to 0.3%.
German indicators continue to point to an expanding German economy. Retail Sales jumped 1.1%, its second-highest gain in 2017. Factory Orders gained 1.0%, while unemployment claims dropped 9 thousand – the indicator has declined every month in 2017 except one. Although the manufacturing and services PMIs dipped in July, both are well over the 50-level, indicative of expansion. The strong German numbers have helped boost the eurozone economy. Eurozone GDP gained 0.6% in the second quarter, up from 0.5% in the previous quarter. As well, Eurozone Retail Sales gained 0.5%, marking a 4-month high.
Federal Reserve policymakers continue to talk about the possibility of a December rate hike, but with the odds for a December increase pegged at just 42%, it’s clear that the markets are skeptical about a third rate hike in 2017. Investor attention has shifted to the Fed’s balance sheet, which stands at $4.2 trillion. Fed policymakers have broadly hinted at reducing purchases of bonds and securities starting in September, but San Francisco Fed President John Williams was more forthcoming about the Fed’s plans this week, in a clear message that was likely aimed at giving notice to the markets. In a speech on Wednesday, Williams said that the economy had “fully recovered” from the 2008 financial crisis and called on the Fed to start trimming the balance sheet “this fall”. Williams added that the process would be gradual and would take four years to reduce the balance sheet to a “reasonable size”. On Wednesday, two other FOMC members also came out in support of starting to taper the balance sheet – St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester.
How will the Fed’s trimming of the balance sheet affect the US dollar? The Fed is widely expected to begin the process in September, by not replacing maturing bonds, which will reduce the balance sheet by $200 billion in 2017, according to the Institute of International Finance (IFF). The IFF estimates that this would be equivalent to three normal interest hikes, so the greenback should head upwards once the Fed starts winding down its bloated balance sheet.
