Improving European Indicators Not Enough to Alter QE Program
The euro is lower versus the dollar ahead of the European rate statement. The USD has advanced versus the single currency after Fed members put the U.S. interest rate hike on the table for March. Political risk from European elections, in particular the French election, have put downward pressure on the euro despite inflation recovering above the 2 percent target set by the central bank.
The European Central Bank (ECB) will release its rate statement on Thursday, March 9 at 7:45 am EST (12:45 pm GMT). The market is not expecting a change in rates, but will look to President Mario Draghi for further insight into the ECB’s plans to taper its quantitive easing (QE) program. European economic recovery has sparked calls for a tapering call, but the central bank could remove key words and emphasis on the need to keep monetary policy accommodative. The EUR will be under pressure if Draghi’s press conference is less dovish than expected a day ahead of what investors deem the final hurdle before a March rate hike form the Fed, the NFP jobs report. Mr. Draghi will have a tough job of communicating to the market that while there is evidence of a recovery, it would be premature to reduce the size of the stimulus program.
The words from U.S. Federal Reserve members have bought the ECB some room to maneuver as a Fed March rate hike is priced in for next week reducing the urgency of ECB action for later in the year. Political anxiety will continue to drive the EUR as improving inflation data had help from volatile energy and food prices.
The EUR/USD lost 0.313 percent in the last 24 hours. The single currency is trading at 1.0544 after the ADP Non-Farm Employment Change showed U.S. private employers added 298,000 new jobs in February. The forecast called for a gain of 184,000 and the final number was an improvement of the updated 261,000 figure reported last month. The USD gained with the release ahead of the U.S. non farm payrolls (NFP) report on Friday.
Quarterly U.S. Labor productivity was unrevised at 1.3 percent from preliminary data. U.S. productivity slowed down in the last quarter of 2016 after a 3.3 percent increase in the third quarter. Lack of wage growth has been the biggest obstacle for the Fed’s tightening monetary policy and are tightly correlated with gains in productivity.
The uneven recovery of the Eurozone members will also be reflected in the mix of hawks and doves in the ECB governing council. Fluctuations in energy prices like the one seen today where oil dropped more than 4 percent after an increase of U.S. inventories was announced limit the positive growth of inflation in the European Union.
Oil lost 4.244 percent in the last 24 hours. The price of West Texas is trading at $50.66 after the release of U.S. weekly crude inventories showed a buildup of 8.2 million barrels exceeding the forecasted 1.1 million. Last week’s data is a record going back to 1982 and bring back oversupply factors that precipitated the drop of energy prices in the last two years. The Organization of the Petroleum Exporting Countries (OPEC) agreement to reduce production has managed to bring prices back up after sluggish demand and over supply but even as compliance has been high it is not binding for U.S. shale producers who have ramped up production to a yearly high.
Saudi Arabia was the main architect of the market share grab that helped oversupply drive down energy prices globally and to their credit they are the main force behind the OPEC production cuts, but it remains to be seen if the efforts of their membership and other major producers can really offset low demand around the world, even at low prices.
Market events to watch this week:
Thursday, March 9
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Unemployment Claims
Friday, March 10
4:30am GBP Manufacturing Production m/m
8:30am CAD Employment Change
8:30am USD Non-Farm Employment Change
*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
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