Euro Slips as German Coalition in Danger
July 2nd: Highlights
- Seehofer offers resignation as immigration crisis deepens
- Hard Brexit fears hit growth
- Dollar awaits fresh trade initiatives
Merkel dealt new blow by coalition partner
Merkel may welcome the departure of Seehofer but with many in his party sharing his ideals, his replacement is unlikely to share her views on immigration. There are elections coming in the CSU’s home state of Bavaria and they face losing their majority there for the first time in living memory, as voters believe that the country is being too soft in its demands from fellow EU members.
This has dealt a further blow to Merkel’s support and threatens to unseat her from power. On Friday, following the EU Summit agreement, Merkel had received a vote of confidence from her party who supported the EU pact believing that immigration is a matter to be dealt with by the entire EU with no single country expected to bear any more of the burden than another despite geography.
The single currency, which rose to 1.1690 versus the dollar, following the news of Friday, reversed those gains overnight and has so far (05.30 GMT) fallen to 1.1650 and is sure to remain under pressure as European markets open.
Growth slowing as Hard-Brexit fears grow
Almost every sector of the UK economy is starting to consider measures that need to be put in to place following a hard-Brexit as the Government dithers over its proposals for its future relationship with the bloc.
It has now become a moot point whether departure from the EU is the right thing for the UK to be doing, economically or not. Most of the population is now concentrating on the handling of the negotiations. The Government, in an unenviable position, has not been helped by a significant “remain” section within its numbers who are determined to both undermine efforts to leave the single market and customs union, avoid a hard-Brexit, and ensure that Parliament has some say in re-negotiation should the there be no agreement.
Q2 growth data was released in the UK on Friday and this confirmed most people fears of a continued slowdown in the economy. Growth was just 0.2% in the period from January to March. Despite adverse weather, business investment is in danger of “falling off a cliff”. Uncertainty is the major threat to any business as it affects every area from planning to purchase of raw materials and hits the morale of workers who tighten their purse-strings with the consequent effect of consumer confidence and spending.
The pound remained unchanged against the Euro on Friday but has rallied overnight as the euro falls following the migration crisis engulfing Germany. Versus the dollar, the pound managed to rally to 1.3177, recouping the losses of the previous two days. It appears that traders have become hardened to the fortunes of the UK economy, buying Sterling in relief that the data wasn’t even worse.
Dollar drifting ahead of Trade and employment announcements
The dollar has entered a reactive stage which may continue for the early part of the week as traders “gear-up” for both the employment report which will be released on Friday and the White House announcement over its next steps in the growing trade conflict. It is expected that the next steps will be more the “protect American business from theft of its technology” than the (possibly) futile attempts to reduce the trade deficit.
Since the rate hike which took place a couple of weeks ago, the economic data has generally been supportive, but the “acid-test” comes this week in the shape of the rate of growth in wages. The headline is that non-farm payrolls are becoming largely ignored as anything more than a lottery, but wage increases are a significant indicator of future price growth.
Personal consumption data which is said to be the FOMC’s favoured measure of inflation was released on Friday. The year on year figure rose to 2.3% from 2% in April and exceeded analysts’ expectations for a rise to 2.2%. While this justifies the Fed’s prediction for two further hikes in 2018, it doesn’t do any more than that
The dollar index has recovered Friday’s fall to 94.47, reaching 94.76 overnight. It seems to be capped at 95.25 but has strong support at 94.50 and will probably trade within that range until the end of the week.
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.”