Data and Politics Drive Euro Higher

Social Democrat U-turn to rescue Merkel

The Euro climbed by 0.80% versus the dollar in Friday as a probable solution was found to the German Constitutional crisis that had threatened to derail Angela Merkel’s fourth term as Chancellor and bring about another election where fears of a continued surge in support for the far-right AfD was bringing concern.

The single currency reached 1.1951, its highest level since late September before falling back to close at 1.1930. Any further gains may be hard to come by as Friday’s move was in a holiday thinned market and there are strong resistance levels on the approach to the psychologically important 1.2000 level.

A Grand Coalition between Merkel’s CDU/CSU alliance and the Social Democratic SPD Party had formed the basis for Government in Germany during much of Merkel’s time in office. However, in the runup to the September election, their leader decided that they wanted to be judged on their own merits and announced that there would be no Grand Coalition going forward.

Pressure has been brought to bear upon Martin Schulz, the Leader of the SDP to return to Government to avert the prospect of a minority Government or fresh elections.

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German Data strong but…

There was never any doubt that the current monetary policy adopted by the European Central Bank would benefit the German economy and there were fears that it would start to overheat, stoking inflation fears. The highly respected IFO Institute, based in Munich, produces data on the German economy, its business confidence and industrial activity.

The release of this data on Friday showed that confidence is at a record high as low inflation growth produces an economic miracle for the Eurozone’s largest economy.

Traders were prepared to use Germany as a proxy for the entire Eurozone and bought the euro accordingly. However, the European Central Bank is very clear in its view that monetary policy needs to be suited to the entire region and while they will be pleased at the level of confidence and activity in the German economy it will have no bearing on their view regarding either a rate hike or a more rapid withdrawal of extraordinary support. Mario Draghi the ECB President has been very clear in his assertion that the growth being seen in the weaker economies is still due to the presence of the Asset Purchase plan so, despite it being cut in half, it will remain in place until the end of 2018.

A slow week for data to be enlivened by Brexit

The pound fell against a stronger Euro on Friday reaching 1.1158 having risen during the week on the back of optimism that stage two of Brexit talks was about to be confirmed as starting.

European Commission President Donald Tusk appeared a little more hawkish than his colleague Jean-Claude Juncker on Friday telling British Prime Minister Theresa May that there was still a great deal of work to be done and giving her an absolute deadline of December 4th to provide proposals for the three major points that need to be cleared before stage two of the talks can begin.

Versus a slightly weaker dollar the pound rose a little reaching 1.3360 although it drifted lower to close the week at 1.3330 and has started this week on the back foot falling to 1.3311.

The issue of the Irish border is likely to require some major consultations between Dublin, Belfast and Westminster as both sides in Ireland defend their position vehemently. Dublin has threatened to veto any agreement which leads to a closed border. There is also a “chicken and egg” situation developing as the EU say talks can’t move to discussing trade until the border question is resolved and U.K. Trade Minister Liam Fox commenting that until trade talks begin there can be no agreement on the Irish border.

This week’s events of note

The last “proper” week of the year. No major data all week but Brexit will continue to dominate together with the Political situation in Germany and the outlook for a rate hike in the U.S. As Friday is Dec 1, te employment report in the U.S. will be released on Dec 8Th. They don’t want to give away just how estimated the data is!