Fundamental Analysis

Euro Remains Steady, Markets Eye Draghi Speech

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The euro has posted slight gains in the Friday session. Currently, EUR/USD is trading at 1.1791,up 0.17% on the day. In economic news, the eurozone releases current account, with the surplus expected to narrow to EUR 30.2 billion. Investors will be keeping a close eye on the Frankfurt European Banking Congress, as ECB President Mario Draghi and the head of the German central bank, Jens Weidmann, will deliver remarks. In the US, the focus is on housing data, with the release of Building Permits and Housing Starts. Both indicators are expected to post stronger numbers for October.

Round one to Donald. The House of Representatives voted 227-205 in favor of legislation that would overhaul the US tax code for the first time in 30 years. This is a significant victory for President Trump, who is yet to sign into law a major piece of legislation in his term in office. However, the next step promises to be more difficult, as the Senate is working on its own bill, and the Republicans have a slim majority. Both bills provide for major tax relief and cut corporate taxes from 35% to 20%, so the US dollar is expected gain ground if the proposal does become law.

The eurozone economy continues to perform well in the third quarter. German GDP accelerated to 0.8%, while Eurozone Flash GPD remained steady at 0.6%. However, inflation remains the fly in the ointment, with levels well below the ECB target of around 2 percent. Weak inflation has kept the ECB cautious regarding its monetary stimulus program. The ECB said in October that it would chop asset-buying from EUR 60 billion to 30 billion each month, but added that it was extending the scheme until September 2018. Jens Weidmann and other senior policymakers want the ECB to act more aggressively, and have called on the ECB to announce a termination date to its stimulus program. However, Mario Draghi appears in no rush to wrap up the scheme, especially with no inflation pressures on the eurozone economy. With Draghi and Weidmann holding different views on stimulus, it will be interesting to hear both central bank heads speak at the same event on Friday.

Soft inflation is also a serious concern in the US, and October consumer inflation numbers were predictable, but sluggish. CPI and Core CPI matched the forecasts, with gains of 0.1% and 0.2%, respectively. Consumer spending reports were a mix – retail sales gained 0.1%, shy of the estimate of 0.2%. Core Retail Sales came in at 0.2%, beating the forecast of 0.0%. The Federal Reserve would certainly like to see higher inflation numbers, which remain well below the Fed inflation target of 2.0%. Still, the markets are very bullish on additional rate hikes, as the odds of upcoming rate hikes continue to move higher. Currently, the likelihood of a rate hike in December stands at 96%, and a January raise is priced in at 94%.

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MarketPulse
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