EUR/USD is showing little movement this week, as the pair hovers close to the 1.19 level. Currently, the pair is trading at 1.1942, up 0.24% on the day. In economic news, German Factory Orders declined 0.7%, well off the forecast of a 0.2% gain. Eurozone Retail PMI edged lower to 50.8 points. In the US, today’s key event is the ISM Non-Manufacturing PMI, which is expected to strengthen to 55.8 points. On Thursday, the ECB releases its rate statement, and the US publishes unemployment claims.
The streaking euro broke above the symbolic 1.20 level in August, and could make another run at 1.20 this week. The euro has gained some 13% against the dollar in 2017, with two main reasons for the appreciation. First, the euro-area economy has looked impressive this year, led by robust growth in Germany. Second, there is increasing speculation that the ECB will taper its asset purchase program (QE), which is scheduled to terminate in December. The ECB is yet to decide what to do next, and analysts do not the details of the new program to be announced until October or possibly December. ECB policymakers must weigh competing interests – Germany would like nothing more than the ECB to simply exit the program, which was brought in as an emergency measure to begin with. However, other eurozone members, which are not enjoying German-style growth, favor a gradual tapering of the program, perhaps lowering monthly asset purchases from EUR 60 billion to EUR 45 billion. The stronger euro is equivalent to a raise in interest rates and has resulted in monetary tightening, so the ECB may favor a slow exit. Aside from the headache of a stronger euro, ECB policymakers must wrestle with the dilemma of a stronger economy that remains gripped by very low inflation. Will the ECB address these concerns at the Thursday meeting? Any hints about a change in monetary policy could have a sharp impact on the euro.
US employment numbers were anything but impressive last week, as nonfarm payrolls tumbled to 156 thousand and wage growth slowed to just 0.1%. The soft numbers weren’t lost on the Federal Reserve, as FOMC member Leal Brainard weighed in interest rate policy on Tuesday. Brainard noted that inflation remained “well short” of the Fed’s target of 2%, and urged the Fed to act cautiously and resist raising interest rates until inflation moves higher. Brainard did acknowledge the rebound in the US economy, saying that the economy was on “solid footing”. A December rate hike remains very much in doubt, with odds of an increase at just 30%. With the likelihood of a rate hike pegged at less than 2% at next week’s policy meeting, the markets will be focusing on the Fed’s balance sheet, which stands at $4.2 trillion. Earlier in the year, the Fed outlined plans to reduce the balance sheet, and analysts expect further details at the September meeting.
