It continues to be a quiet week for the euro, as EUR/USD stays close to the 1.20 level. Currently, EUR/USD is trading at 1.2004, up 0.08% on the day. On the release front, there are no major eurozone indicators on the schedule. German PPI remained unchanged at 0.2%, edging above the forecast of 0.1%. In the US, the Federal Reserve winds up its policy meeting and will release a rate statement. We’ll also get a look at Existing Home Sales, which is expected to improve to 5.46 million. On Thursday, ECB President Mario Draghi will deliver remarks at the European Systemic Risk Board conference in Frankfurt. The US will release unemployment claims and the Philly Fed Manufacturing Index.
The eurozone is enjoying solid growth, with much of the credit going to Germany, the largest and strongest economy in the bloc. The German economy continues to perform well, with low unemployment, strong consumer demand, and a robust export sector. Institutional investors and analysts like what they see, as German ZEW Economic Sentiment Sentiment rebounded in September and climbed to 17.3 points, following a disappointing reading in August of 10.0 points. The ZEW report was very positive, noting that German growth in the second quarter remained strong, and both the public and private sectors were marked by increased investment. The report added that the stronger euro had not had a negative impact on the German economy, and the upcoming German election had not caused any uncertainty in the markets.
Janet Yellen & Co. will be on center stage on Wednesday, as the markets prepare to pore over the Federal Reserve’s September rate statement. There is virtually no chance that the benchmark rate of 1.25% will change, so analysts have two things in mind – the Fed balance sheet and inflation. Earlier in the year, the Fed outlined plans to begin reducing its bloated balance sheet of $4.2 trillion, and the markets are expecting more details, such as a start date for the tapering. The Fed is expected to reduce the balance sheet by not replacing some maturing bonds, starting at $10 billion/month, and gradually moving higher. This move can be viewed as a mini-rate hike, and could provide a boost for the US dollar against major rivals, such as the euro. However, if the Fed does not address its balance sheet, the markets could get nervous and the US dollar could lose ground. As for inflation, persistently low levels remains well below the Fed target of 2% and this has hampered plans for a third rate hike in 2017. Janet Yellen has not discussed a December move, but in recent weeks, some FOMC members have come out against another rate hike before inflation moves higher, even if this means waiting until 2018. If the rate statement addresses the timing of another rate hike, we could see substantial movement from the US dollar.
