The euro is showing very little movement on Wednesday, as EUR/USD trades at the 1.04 line. On the release front, the Eurozone will release Consumer Confidence, with the markets expecting a weak reading of -6 points. In the US, today’s highlight is Existing Home Sales. The indicator is projected to drop to 5.52 million. The markets will have some key indicators to work with on Thursday, as the US releases three key events – Core Durable Goods Orders, Final GDP and unemployment claims.
With Eurozone indicators pointing to improvement in growth and inflation data, it’s no surprise that Eurozone confidence indicators have been pointing upwards in the fourth quarter. In Germany, Ifo Business Climate improved to 111.0 points in December, its highest level since April 2014. Investors and analysts also remain confident about the economy, as underscored by the December ZEW Economic Sentiment reports. The German indicator remained at 13.8 points, although this was short of the forecast of 14.2 points. The Eurozone report jumped to 18.1, beating the estimate of 16.5. These figures point to optimism over growth aspects in the Eurozone and in Germany.
The Federal Reserve rate hike sent the euro reeling and the currency is struggling to remain above the 1.04 level. Currently, EUR/USD is trading at its lowest levels since January 2003. If the decline continues, we’re likely to hear growing talk about parity between the US dollar and the euro, which last occurred in December 2002.
December seems to be that special time of year for the Federal Reserve. When the Federal Reserve raised interest rates in December 2015, the Fed confidently predicted a series of rate hikes in 2016 in order to keep a hot US economy in check. However, the Fed remained on the sidelines throughout 2016 and refrained from any rate hikes until last week. There were several false starts along the way, as expectations that the Fed would raise rates earlier in 2016 failed to materialize. This led to sharp criticism of Janet Yellen for failing to provide a clear monetary policy. Yellen seems to have been keenly aware of this, as the Fed did everything short of buying advertisements in daily newspapers to get out the message that it planned to raise rates in December. Indeed, a rate hike was priced in as high as 100% by some analysts. Yellen should certainly be commended for a clear message to the markets.
With the December rate hike behind us, what’s next for Janet Yellen & Co.? In September, Fed officials said they expected two rate hikes in 2017, but the Fed is now projecting three or even four hikes next year. However, projections need to be adjusted to economic conditions, and the markets will understandably be somewhat skeptical about Fed rate forecasts. As well, the wild card of Donald Trump could also play a critical role in monetary policy. Trump’s economic platform remains sketchy, apart from declarations that he will increase government spending and cut taxes. Still, there is growing talk about ‘Trumpflation’, with the markets predicting that Trump’s policies will increase inflation levels, which have been persistently weak. If inflation levels do heat up, there will be pressure on the Fed to step in and raise interest rates.
Wednesday (December 21)
- 14:00 Belgian NBB Business Climate. Estimate -1.1
- 15:00 Eurozone Consumer Confidence. Estimate -6
- 15:00 US Existing Home Sales. Estimate 5.52M
- 15:30 US Crude Oil Inventories. Estimate -2.4M
Thursday (December 22)
- 13:30 US Core Durable Goods Orders. Estimate 0.2%
- 13:30 US Final GDP. Estimate 3.3%
- 13:30 US Unemployment Claims. Estimate 255K
*All release times are GMT
* Key events are in bold
EUR/USD for Wednesday, December 21, 2016
EUR/USD December 21 at 9:50 GMT
Open: 1.0391 High: 1.0419 Low: 1.0381 Close: 1.0400
- EUR/USD posted small gains in the Asian session and is flat in the European session
- 1.0287 is providing support
- 1.0414 remains a weak line in resistance
Further levels in both directions:
- Below: 1.0287, 1.0170 and 1.0028
- Above: 1.0414, 1.0506, 1.0616 and 1.0708
- Current range: 1.0287 to 1.0414
OANDA’s Open Positions Ratio
EUR/USD ratio remains unchanged this week. Currently, long positions have a majority (56%), indicative of trader bias towards EUR/USD reversing directions and moving upwards.