European Central Bank Expected to Hold in 1st Meeting of 2017

US inflation and Yellen comments boost USD ahead of ECB

The European Central Bank (ECB) will publish its minimum bid rate on Thursday, January 19 at 7:45 am EST. Central banks will be off to a slow start in 2017 as the ECB is also expected to keep interest rates and its QE program unchanged in the first meeting of the year. The lack of quality assets for purchase is one of the factors that forced the ECB to trim its QE program but rising inflation expectations could further reduce the monthly amount dedicated to those purchases this year.

The USD bounced back from Trump comments that deemed the currency “too strong”. There were no surprises from US consumer inflation numbers in December. The consumer price index (CPI), the primary gauge of consumer inflation, edged up to 0.3%, while Core CPI remained unchanged at 0.2%. Both indicators matched the forecasts. Inflation levels are close to the Federal Reserve’s target of two percent, which means that policymakers will likely stick to their plan of gradual, modest rate hikes in 2017.

U.S. Federal Reserve Chair Janet Yellen kept the multiple U.S. interest rate hike expectations alive with her comments in San Francisco. After taking almost a decade for two rate hikes Yellen is now concerned about waiting too long to begin a faster monetary policy tightening.

The EUR/USD lost 0.401 percent in the last 24 hours. The single currency is trading at 1.0665 after consumer price index data came in as expected and comments from U.S. Federal Reserve Chair Janet Yellen pointed to more rate hikes. The U.S. central bank is now issuing a warning about waiting too long to keep up with inflationary pressures. Energy prices rebounded in two stages last year. First in February when Saudi Arabia first floated the idea of a production freeze and later in the year when it was finally announced at the Algiers meeting. A non-OPEC compromise soon followed.

European inflation has been positively affected the EUR as Kenny Fisher wrote earlier today

Eurozone inflation continues to point upwards. German Final CPI jumped 0.7%, up from 0.1% a month earlier. This marked the indicator’s strongest gain since March 2016. Eurozone Final CPI also impressed, with a gain of 1.1%, compared to 0.6% in the previous release. Meanwhile, investor/analyst expectations improved in January, although the markets were hoping for more. German ZEW Economic Sentiment rose to 16.6, shy of the forecast of 18.9. Eurozone ZEW Economic Sentiment jumped to 23.2 points, short or the estimate of 24.2. These indicators point to optimism about economic conditions from investors and analysts.

The rise in the U.S. CPI in December marked the first time in two and a half years above the Fed’s target of 2 percent. Steady inflation and a strong employment component are backing up Chair Yellen’s statement about the Fed’s actions in 2017. Donald Trump awaits his inauguration as the 45 President of the United States on Friday and he will hit the ground running with some executive actions expected to be signed that day.

On the other side of the Atlantic the European Central Bank (ECB) is facing an improved economy as inflation has gained momentum, but the dark clouds of political turmoil are plain to see. Elections in France, Germany and the Netherlands with continuing uncertainty in Italy will put pressure on the EUR. The hard stance on Brexit could also hurt the Union’s growth as it it hard to quantify what will be lost if there is not even a back up deal in place when Britain leaves. Brussels is using this as a threat to any want away member to avoid a run for the exit, but it might end up causing more damage in the long run to remain inflexible.

Market events to watch this week:

Thursday, January 19
7:45am EUR Minimum Bid Rate
8:30am CAD Manufacturing Sales m/m
8:30am EUR ECB Press Conference
8:30am USD Building Permits
8:30am USD Philly Fed Manufacturing Index
8:30am USD USD Unemployment Claims
11:00am USD Crude Oil Inventories
9:00pm CNY GDP q/y
Friday, January 20
4:30am GBP Retail Sales m/m
8:30am CAD CPI m/m
8:30am CAD Core Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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