Single currency facing “fight for its life”

During its existence, the euro has been faced with severe difficulties which have been driven by its own characteristics. One size fits all has been the mantra of the economic support for the single currency and that was sternly tested by the financial crisis ten years ago.

Over the period that the Eurozone economy has been recovering, the Governments of the most indebted nations; Greece, Spain, Portugal and, perhaps surprisingly, Belgium, have been positive and compliant towards their commitment to their responsibilities.

However, since the election of a Nationalist Government in Rome, that whole scenario has changed. The rhetoric from the leaders of the Italian coalition has been about their responsibility towards their people rather than Brussels. This is a highly emotive stance and could easily be copied by the other nations which have been forced into austerity measures that border on penury.

Should Rome continue to ignore Brussels ultimatums and no longer engage in dialogue, the EU Commission will be placed in a very difficult position which, if taken to its ultimate conclusion, could lead to the expulsion of Italy from the Eurozone. The irony of this is that it may suit a proportion of the Italian public who love being European but hate the financial constraints of the euro.

It is extremely unlikely that this story will end with the expiry of Brussels ultimatum for Rome to amend its 2019 budget by Tuesday, and the single currency may be the only victim in the short term.

With German Inflation and GDP data due for release this week the economy is also going to be in focus. Inflation is at a six-year high in Germany and this is a significant indicator for the entire region. With the currency weakening, pushing up producer prices, this situation can only worsen. Growth data is likely to follow weakening PMI reports. There is, therefore, a significant downside risk despite the market’s expectation that the German economy will have contracted by 0.1% in Q3.

The euro fell against a strengthening dollar on Friday reaching a low of 1.1316, closing in on its low for the year.

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Departure of another Cabinet Minister pressures Sterling

As if the departure of another Minister, the seventh in total, over Brexit wasn’t enough, the fact that it was Jo Johnson who is a remainer means that the Government is facing the real threat of a defeat when it finally puts its Brexit agreement in front of Parliament. Mr. Johnson, brother of prominent Brexiteer Boris, called for another referendum on Brexit in which, he asserted, there should be a remain option.

Interestingly, opposition leader Jeremy Corbyn distanced himself from calls for a second referendum, commenting that the decision had been made and his party, according to his Shadow Brexit Secretary, will vote against what they both called a blind Brexit.

The pound reacted predictably to the renewed pessimism over the possibility of a breakthrough even though there is still brave talk from both sides throwing out dates for an agreement like confetti. “No deal is better than a bad deal” has also made a reappearance as the new deal has been pronounced “dead before arrival”. The currency fell to a low of 1.2958 versus the dollar before closing at 1.2969. Overnight, the pound has opened appreciably lower in Asian trade. It so far has reached a low of 1.2901 (0530 GMT).

This week, being the third in the month, sees the release of the employment and inflation reports as well as retail sales. Wage inflation is expected to remain at 3.1% and unemployment has probably fallen again. Inflation will have risen to 2.5% following last month’s surprise fall to 2.4%. The recent gyrations of the pound will have had little effect on inflation, but as wages rise above trend, we may see it move back towards 3% in the coming months.

Finally, retail sales, which have contributed to a lot of “angst on the high street”, may have recovered a little as the end of season sales have acted as a prelude to Black Friday and the Holiday Season.

Dollar support impenetrable

“Central Banks always get what they want in the end” is a common thought among traders, but maybe Presidents don’t. The ECB is clearly the exception to that rule.

The FOMC ensured a positive end to the year for the dollar as Chairman Jerome Powell produced a positive view of the U.S. economy following last week’s rate-setting meeting, prompting expectations of a rate hike at the December 18/19 meeting.

That may see investors suffer into year-end as higher rates will tend to mean a fall in equity indices. It will interesting to hear the President’s comments on the December hike as he seemed to have reached close to the bottom of his lexicon when he called the FOMC “loco” recently.

It is hard to say what President Trump’s attitude is to a stronger dollar despite his disagreement with his Treasury Secretary earlier in the year when Mnuchin stated a preference for a weaker greenback. Trump seems able to equate higher rates with weaker equities but not with a stronger dollar.

A strong dollar obviously makes U.S. imports cheaper and means that domestically produced goods become uncompetitive. As the trade issues have faded somewhat, according to the President and his “positive” conversation with his Chinese counterpart further sanctions before Q1 are looking less and less likely.