The euro is trading sideways on Monday, after an uneventful week. Currently, the pair is trading at 1.2463, up 0.06% on the day. On the release front, Eurozone and German Services PMIs improved in January. Both readings beat their estimates. Eurozone retail sales declined 1.1%, matching the forecast. Later in the day, ECB President Mario Draghi testifies on the ECB’s Annual Report for 2016 before the European Parliament. In the US, the sole event on the calendar is ISM Non-Manufacturing PMI. The indicator is expected to rise to 56.5 points. On Tuesday, Germany releases Factory Orders and the US publishes JOLTS Job Openings.
With the eurozone economy continuing to perform well, there has been speculation that the ECB could wind up its asset-purchase program (QE) in September and shift to a normative policy, and perhaps raise interest rates. However, Mario Draghi and other ECB members have taken pains to reiterate that the Bank is in no rush to end QE. On Wednesday, executive board member Benoit Coeure joined the chorus, saying that although QE “will not last forever” policymakers were in agreement “that we have to be patient and prudent because we are not yet where we want to be in terms of inflation”. Investors would be well advised to keep a close eye on eurozone and German inflation numbers, as asset purchases could be extended beyond September if inflation remains well below the ECB target of around 2.0%.
There was a changing of the guard at the Federal Reserve on the weekend, as Jerome Powell took over as chair, replacing Janet Yellen. On Friday, Yellen waxed optimistic about the economy, saying that strong growth, a red-hot labor market and increased wage growth would require the Fed to gradually raise interest rates. Powell is expected to continue to Yellen’s policies, so the markets are not expecting any dramatic shifts. However, the massive US tax cut will have a strong impact on the US economy, and the markets will be looking to the Fed for guidance. If the Fed sounds optimistic about the tax reform package, the US dollar could move higher.
