EUR/USD: Euro on front foot amid upbeat ECB talks & prospect of German political stability

• ECB scripts were hawkish today.
• Market may focus on Q4 German GDP on Wednesday.

EUR/USD is now trading around 1.2276 at mid-New York Session, up by almost 0.20% and so far made a high of 1.2296 on upbeat ECB talks & prospect of German political stability.

Today ECB’s Nowotny said that the Euro-area inflation has room to move higher, so ECB is still on the careful side. Nowotny also emphasized that US is exerting political influence on the exchange rate.

ECB’s Nowotny also noted the recent equities sell-off is normal and that the task of central banks isn’t to satisfy markets but to ensure economic stability. So if necessary, rates will have to rise and markets will have to adapt to that.

On QE, he said “I don’t think we will need it (after September), at least not in its current form”. On inflation, he noted that it still has room to move higher, so the ECB is still on the careful side, but that won’t last forever, as “in the foreseeable future there will be a need for the ECB to raise rate”.

ECB’s Visco commented that risk of deflation  wasaverted, FX volatility seen as main risk for inflation.

It now seems that ECB policy makers are now increasingly talking about change in policy guidance from full QE tapering to an eventual normalization of monetary policy. ECB is not so much concerned about te currency strength unlike in the past, as overall Euro zone economy is now robust and resilient amid mixed EU economic data.

Market may be quite confident that after September 2018,  the ECB will end its APP (asset purchase program) by a short three months taper within December 2018 and thereafter may gradually hike from Q1 (2019).

Last week, German factory data & IIP (industrial production) came upbeat, while trade data (export/import) was muted. Looking ahead, market may focus on Q4 German and EZ GDP on Wednesday.

Merkel is quite confident about prospect of a “grand coalition” government:

Apart from economics, EUR may have got some support from German politics also, as German Chancellor Merkel said she’s determined to serve another full term, rebuffing party critics who say she sold out to the Social Democrats (SPD) to extend her 12 years in office

There was a report that said that the SPD leader Schulz will be replaced on Tuesday when the SPD leadership meets and Nahles will be appointed as acting party Head. Earlier on Friday, Mr. Schulz has declared his withdrawal from a (proposed) role in the federal government but said he wanted party members to vote in favour of the coalition government with Ms Merkel’s (CDU) bloc. Elsewhere, Ms Merkel noted that it’s acceptable to give the finance ministry post to the SPD and that “a finance minister can’t just do what he wants”.