Euro Suffers Merkel struggles with Coalition

German politics draws parallels with U.K.

Unrest with “traditional” political parties and their old-fashioned adherence to differences and policies honed over many years is starting to spread across Europe. In the U.K. the ruling Conservative Party was shocked by the result of June’s General Election and how the opposition could galvanize the “young vote” and come close to bringing about a victory for a Party that a year ago was in disarray.

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.

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Yellen signals rate hike despite benign inflation

In a speech yesterday designed to provide clear advance guidance to the markets of the intentions of the Fed, Janet Yellen, the Fed Chair confirmed that the Fed is focussing on future macroeconomic developments rather than the current situation when determining the path of interest rates. She said it would be irresponsible of her and her colleagues to wait until inflation reaches 2% before acting in a precipitative manner and having to raise rates at a faster pace than the gradual way it has acted so far in this cycle.

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

The ability of any political party in the U.K. to even form a definitive policy on Brexit, let alone deliver a coherent set of proposals to Brussels is beginning to look a forlorn hope.

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.