Wed, Jan 20, 2021 @ 07:47 GMT
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Euro Stems Slide, Markets Await German CPI

EUR/USD is unchanged in the Thursday session, after recording losses in the past two sessions. Currently, the pair is trading at 1.2308, down 0.01% on the day. On the release front, Germany releases Preliminary CPI, which is expected to remain unchanged at 0.5%. German unemployment change posted a strong decline of 19 thousand, better than the estimate of 15 thousand. There are a host of key indicators in the US, led by unemployment claims and consumer confidence. The markets are expecting unemployment claims to tick higher to 230 thousand, while UoM Consumer Sentiment is forecast to rise to 131.2 points.

There was good news for the US dollar on Wednesday, as US revised GDP for the third quarter came in at 2.9%, beating the estimate of 2.7%. This reading was revised upwards from the initial GDP estimate of 2.5%. Fourth quarter growth, although solid, could not keep up with a superb third quarter, which posted a gain of 3.2%. As for 2018, first quarter growth is expected to soften to 1.8%, but there is still a strong chance that the economy could hit 3% growth this year, as promised by US President Trump. The catalysts for such a rosy prediction are the massive tax cut and higher government spending. Where does this leave the Federal Reserve, which raised interest rates last week? Currently, the Fed is projecting to more rate hikes this year, but if the economy remains strong and inflation levels move closer to the Fed target of 2%, we could see four rate increases in 2018.

In the eurozone, the storyline of stronger economic conditions but low inflation continues in 2018. This trend adds up to the ECB staying the course with regard to its stimulus program, according to a senior ECB policymaker. Governing Council member Erkki Liikanen said on Tuesday that the ECB will have to remain patient with its stimulus program, noting underlying inflation could remain at low levels, even if the economy performs well, since reducing economic slack may no longer trigger higher inflation, as has been the case in the past. With the current bond purchase program set to expire in September, there is speculation that the ECB will wind up the program, after years of pursuing an accommodative policy. If inflation does move closer to the ECB’s target of around 2 percent, there is a greater likelihood that the bank will not extend stimulus, and could entertain raising interest rates in 2018.

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