The euro has edged higher in the Wednesday session. Currently, EUR/USD is trading at 1.1857, up 0.14% on the day. On the release front, Germany releases Preliminary CPI, which is expected to accelerate to 0.3%. French data was a mix. Consumer Spending declined 1.9%, missing the estimate of 0.0%. Preliminary GDP in the third quarter remained unchanged at 0.5%. In the US, Preliminary GDP is expected to post a strong gain of 3.3%, and Fed Chair Janet Yellen testifies before a congressional committee.
The political vacuum in Germany has taken a twist, as President Angela Merkel continues in efforts to form a new government. Coalition talks will now center on Merkel’s conservative bloc (CDU) and the social democrats (SPD). After the election, the SPD announced that it would remain in the opposition. However, coalition talks imploded when the Free Democrats pulled out of the negotiations and there is pressure on the SPD to reconsider in order to avoid elections. The SPD is split on whether to join a coalition with Merkel, as many SPD members don’t want the SPD to be relegated to a junior party in the coalition, as was the case prior to the election. Although the SPD has agreed to exploratory meetings with the CDU, substantial talks of a “grand coalition” are not expected to start before 2018. The SPD is likely to take advantage of Merkel’s weak hand and press demands for greater government spending and a looser immigration policy. The SPD could even demand the powerful finance ministry.
Fed Chair Designate Jerome Powell testified before the Senate Banking Committee on Tuesday. Powell said that he favored tailoring regulations for small banks, leaving the toughest regulations for the big players. Powell was cautious and diplomatic during the hearing, saying that the case is building for a December rate hike, and refused to express an opinion on the Trump tax bill. He will replace Janet Yellen in February, and is widely expected to continue Yellen’s monetary stance of small, gradual rate hikes.
Powell inherits an economy that is in excellent shape, but persistently low inflation remains a nagging problem. Fed policymakers have differing views on what to do about inflation, with some members proposing that the Fed drop its 2 percent target, in favor of a “gradually rising path” for prices. The Fed remains confounded by low inflation and wage growth, despite a labor market that is at full capacity. Still, the Fed will likely pull the rate trigger next month, and could raise rates up to 3 more times in 2018 if the economy continues to expand at its current pace.
