Euro Suffers Merkel struggles with Coalition
September 27th: Highlights
- Euro at 10-week low vs. Sterling
- U.S. fiscal reform plans to be released
- Yellen signals continued rate hikes despite inflation
German politics draws parallels with U.K.
It is a similar story now in Germany following Sunday’s Federal election. In the wake of the congratulations heaped upon Angela Merkel for winning a fourth term as Chancellor, comes the reality of trying to form a coalition with minor parties who received a far lower share of the vote than the two main opposition parties.
Mrs Merkel is used to presiding over a “Grand Coalition” which provides continuity and allows Germany to exert huge influence over Europe giving her the power to introduce policies like her “open door” to migrants and refugees. The voters have been sufficiently shaken by the words of the AfD party and the rise in terrorist incidents to look for a new way. The spectre of Nazism casts a huge shadow over Germany but the young voters prefer to look forward rather than back and welcome a Germany first doctrine.
Yellen signals rate hike despite benign inflation
The dollar reacted positively reaching 1.1757 versus the single currency and 1.3409 against the pound.
Lael Brainard the arch-dove of the FOMC will speak later today. In her last speech, she warned against the Fed raising rates in the current climate where the path of inflation is unclear so it will be interesting to see how her words differ from Yellen’s view.
Also, later today the U.S Congress will release a “far-reaching” fiscal reform plan that has been worked on by Republican Congressmen and the White House for more than six-months. This could be the first stage of the President’s long-awaited reform and stimulus package.
Brexit becoming mired in domestic politics
Donald Tusk, the President of the President of the European Council visited Prime Minister Theresa May in London yesterday and came away calling for further clarity from the Government. He said he appreciated the speech made by the Prime Minister last week but the proposals still don’t go far enough to allow the move to phase two of the negotiations.
Sterling has recovered well from its precipitous fall against the common currency and yesterday reached 0.8754 as the political situation drove the Euro lower.
It seems that Theresa May’s speech far from being the breakthrough everyone expected has merely muddied the waters further and widened the gulf that exists in her cabinet over Brexit policy.
The opposition Labour Party has started to “prepare to govern” which looks a little premature. Yesterday at their annual conference they announced that they were working on plans for a run on the pound should they be elected, hardly a confident message to send to the world about their ability to manage the economy.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”