Merkel’s coalition weighs on euro

26th September 2017 Market Update

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?? GBP - Nothing of note for the pound yesterday or today, however it would seem the gains over the last week are holding firm. Brexit secretary David Davis is in Brussels with the EU’s chief negotiator, where he will spend the week fleshing out May’s Florence speech, hoping to move past the recent block in negotiations and move onto discussing a UK-EU trade deal. The talks are due to wrap up on Thursday, so we’re unlikely to see any major moves until then.

Yesterday, the financial policy committee warned that individual banks need to increase their consumer credit safety buffers, describing consumer debt as a “pocket of risk” in an otherwise stable credit market. This came following an early stress test of consumer lending.

?? EUR - Yesterday we saw ECB President Draghi speak in Brussels, where he discussed the current economic outlook and monetary policy measures. At the request of the committee, he focused on the corporate sector purchase programme (CSPP) and monetary policy implementation across the euro area.

Further questions posed on German chancellor Merkel, with her losses in the recent election putting her political party’s power into question. With her only winning a third of the overall votes, she must cosy up with at least two smaller parties to form a government. The political pressure on the euro has led to it weakening.

?? USD - Yesterday we saw the greenback trading higher following comments from FOMC member Dudley, which gave hope for an interest hike in the near future. Fed Chair Janet Yellen is addressing the National Association for Business Economics Annual meeting this evening, delivering a speech titled "Inflation, Uncertainty, and Monetary Policy". Traders will be keeping an eye on this for any clue on potential interest rate moves.

US consumer confidence data will also be released this afternoon, and we expect to see a slight decrease from last month’s figure. Meanwhile on the political front, North Korea continues to issue missile threats to the US.

Key Announcements

?? EUR
Today - Emmanuel Macron Speaks
13:00pm - ECB’s Praet Speaks

?? USD
14:30pm – FOMC Member Mester speech
17:45pm – Fed Yellen’s speech

Our View: Sterling has managed to maintain its momentum and has broken new highs since the 17th of July against the euro. The euro is coming under pressure due to the political situation in Germany; however, Draghi’s speech yesterday gave a positive outlook saying the euro could withstand external shocks. The dollar could maintain its current position, contingent on whether Yellen takes a hawkish stance in her speech this evening.

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