The U.S. Dollar continues its rise following the ongoing concern over the German elections, which seem to have created an issue for Chancellor Angela Merkel who must build a new coalition with minority parties in order to govern smoothly.
USD
The largest economy of the European Union was not predicted to have this political issue, thus the success of Alternative for Germany, a far-right political movement, in snatching legislative chamber seats is cause for concern. It is safe to say this adds to greenback’s recent good fortunes as the Fed has shown confidence in the economy and their ability to hike interest rates.
Nevertheless, there could be a chance for dissidence within the Fed. New York Fed President William Dudley and Chicago’s Charles Evans gave different takes on the outlook for rate increments based on inflation. The former said that there should be no concerns and rates should be gradually increased as he considers the lack of inflationary growth temporary.
However, Evans stated that there are structural changes within the economy primarily caused by technology and heavy competition based on prices that could be the cause for stagnant inflationary growth. Chairwoman Janet Yellen may bring more clarity at 12:40PM today when she gives a speech on uncertainty and monetary policy, which will be closely watched for guidance.
EUR
The Euro declined to its lowest level in a month after Asian and European sessions continued to short the currency as the results of German elections seemed to instill fear amongst investors that Merkel will face difficulties in forming a new governing coalition. Surprisingly, Alternative for Germany, a populist political party that despised Merkel’s deal for refugees and abhors the European Union, grabbed over 12.0% of the votes during the general election.
Since Merkel’s Christian Democrats have historically needed some alliances within the Bundestag to pass legislation, the thought of cooperating with these right-wing anti-establishment members is a scary prospect, especially to garner overall support from their own constituents. As far as the Euro is concerned, German stability is of utmost importance and any doubts over it create havoc for the shared currency.
High technical levels may have also been reached after the currency has appreciated by 13.0% this year and many traders feel the drop in strength was a necessary one to satisfy the European Central Bank as well.
GBP
The Pound is down once more on the negativity surrounding Brexit negotiations. Talks between the EU and UK Brexit teams did indeed begin yesterday and they got off to a bad start after British secretary David Davis debunked what Prime Minister Theresa May said at her speech in Florence last week. Friction was present at the table again as Davis made it clear that the UK is looking to first establish terms on a trade deal before focusing on a bill or a transition.
By contrast, the EU’s chief negotiator Michel Barnier explained that May’s statements were still not detailed enough and that far more clarity is expected. It seems like the dark cloud of the divorce will not cease to affect Sterling, which has fallen by 1.0% since mid-September.
