EUR/USD has taken a pause on Wednesday, following strong gains in the Tuesday session. Currently, the pair is trading at the 1.08 line. On the release front, Manufacturing PMIs in Germany and the Eurozone were within expectations and both pointed to expansion in the manufacturing sector. In the US, there are two key indicators – ISM Manufacturing PMI and the ADP payrolls. All eyes will be on the Federal Reserve, which will issue a rate statement and set the benchmark rate, which is expected to remain pegged at 0.50%. On Thursday, the US will publish unemployment claims.
The German economy, the largest in Europe, has been sending mixed messages this week. There was positive news on Wednesday, as German Manufacturing PMI improved to 56.5, pointing to solid expansion. This was just shy of the estimate of 55.5. Earlier in the week, unemployment claims dropped by 26 thousand, as the unemployment rate dropped to 5.9% in January, its lowest level since reunification in 1989. However, key consumer indicators were unexpectedly soft. Germany’s economy continues to raise concerns, as consumer indicators have looked dismal this week. Retail Sales, the primary gauge of consumer spending, posted a sharp decline of 0.9%, its fourth decline in five readings. This reading comes on the heels of Preliminary CPI, which declined 0.6%, its first decline in 9 months.
The Federal Reserve will be on center stage on Wednesday, with the release of its policy statement. After a historic quarter-point raise in December, which pushed rates to 0.50 percent, the Fed is expected to remain on the sidelines in its first release of 2017. What happens next? Just a few weeks ago, Fed officials were talking about a series of rates hikes in 2017 (sound familiar? Please rewind to January 2016 for an identical message). However, after just 10 days on the job, President Trump has proven to be as unpredictable and controversial as ever. Trump has not provided any details about his economic blueprint for the country, but he has raised the rhetoric about “America first” and has already picked a fight with Mexico over a border wall and declaring he would renegotiate the NAFTA trade agreement. After hinting at gradual rate increases, the Fed will likely change gears and adopt a wait-and-see attitude, watching what bills Trump gets through Congress and how the economy responds. If economic growth remains strong, a rate hike in the first half of 2017 will have to be seriously considered by the Fed. The markets have priced in a rate hike by June at 66 percent.