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Euro Drops on Dovish Comments from ECB

EUR/USD is heading lower in the Tuesday session, as the pair trades at 1.0670. On the release front, German Industrial Production dropped 3.0%, well short of the estimate of +0.2%. In the US, the trade deficit is expected to edge lower to $45.0 billion. On the employment front, JOLTS Jobs Openings is expected to improve to 5.56 million.

Eurozone growth and inflation numbers have been moving higher. Inflation, which has been at low levels for years, and climbed in recent months, buoyed by higher oil prices. This is positive news for the ECB, which has long tried to raise inflation with an ultra-loose monetary policy. Still, inflation levels remain well below the ECB’s target of 2 percent. On Monday, ECB President Mario Draghi poured cold water on hopes of a change in monetary policy due to the improved economic climate. Draghi said that the Eurozone economy was not yet strong enough to withdraw the bank’s stimulus program. Draghi’s comments have sent the euro lower, as EUR/USD finds itself below the 1.07 level for the first time in February. There are also market jitters over Marie Le Penn, who kicked off her election campaign on the weekend. Le Pen has promised a referendum on taking France out of the European Union, which has put further pressure on the euro.

Just a few weeks on the job, Donald Trump continues to create controversy and his protectionist rhetoric is not endearing him to the markets. Moreover, the lack of an economic policy from the new administration is a major source of concern and the the post-election euphoria which sent the markets higher has dissipated. The Federal Reserve, which had trumpeted that it was planning a series of hikes in 2017 (sound familiar?), was more cautious in its recent rate statement and is expected to adopt a wait-and-see attitude in the coming months. If the economy continues to grow, there is a strong likelihood of another rate hike in the first half of 2017, which is bullish for the dollar. On the other hand, if Trump makes good on his promises to "make America first" and implement protectionist policies, the greenback could lose ground against major currencies such as the euro.

MarketPulse
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