The euro has ticked lower in the Wednesday session, after considerable losses on Tuesday. Currently, EUR/USD is trading at 1.2330, down 0.10% on the day. It’s a busy day on both sides of the pond for fundamental releases. In Germany, Gfk Consumer Climate edged down to 10.8, matching the estimate. Unemployment claims dropped by 22 thousand, beating the forecast of a decline of 17 thousand. In the Eurozone, CPI Flash Estimate and Core CPI Flash Estimate posted gains of 1.2% and 1.0%, respectively. Both indicators matched their estimates. Over in the US, Preliminary GDP is expected to rise 2.5%, and Pending Home Sales is forecast to climb 2.4%. On Thursday, Germany and the eurozone release manufacturing PMIs. The US will publish unemployment claims, personal spending and manufacturing PMI. As well, Fed chair Jerome Powell testifies before the Senate Banking Committee.
The US dollar showed broad gains after Federal Reserve Chair Jerome Powell’s testimony before a congressional committee on Tuesday. Powell was cautious, saying that the Fed planned to continue its current policy of gradual rate increases, despite the stimulus of government spending and recent tax reform. Powell sounded optimistic about economic conditions, noting that the US economy was benefiting from the global recovery as well as changes in fiscal policy. Importantly, Powell did not address the question of an acceleration of rate hikes. Currently, the Fed has projected three rate hikes in 2018, with increases widely expected at the March and May meetings. However, with inflation moving higher and the economy continuing to perform well, many analysts expect the Fed to raise rates four or more times this year. Any hints at an increased pace of rate hikes could send the US dollar broadly higher.
The markets did a good job estimating inflation data for February, as German and Eurozone CPI readings matched the estimates. The numbers show that inflation remains well below the ECB target of 2 percent, so policymakers needn’t worry about raising rates for some time. The ECB recently lowered its monthly bond purchases, with the program expected to wind up in September. If the economy remains strong, the ECB could opt to raise rates in the fourth quarter or in early 2019.
The week has started well for German president Angela Merkel, who received an overwhelming vote of confidence from her conservative CDU party on Monday. Delegates voted to in favor of the coalition with the socialist SPD party. Merkel’s party did poorly in the September election, and has paid the price as the SPD will receive the financial and foreign affairs portfolios in the new government. This will allow the SPD to set a more liberal policy regarding Germany’s role in the eurozone, and that could mean a shift away from its conservative and rigorous stance towards budgetary issues, such as support for weaker members of the eurozone. The coalition agreement must still be approved by SPD members, who will vote on the measure on March 4.
