The Pound started the week stronger, initially benefitting from the Euro weakening after German coalition talks collapsed. The Euro has since regained ground against the Pound, reversing the earlier losses. Sterling’s strength is pinned to mounting expectation that the UK is making progress toward the financial settlement ahead of December’s EU summit.

The Euro has been on a rollercoaster today as political uncertainty in Germany suggests the need for another election. Chancellor Angela Merkel has remarked: “It is a day of deep reflection on how to go forward in Germany,” promising that Germany will be “well managed in the difficult weeks to come.” On-going political instability in Europe’s largest economy appears to have been shrugged off by the markets as the Euro recovers from earlier losses.

Pound Sterling – UK Markets

The Pound has fluctuated against the Euro today, with the exchange rate staying near €1.12. Sterling has performed well against the US Dollar with the exchange rate set at $1.32.

The main focus of the week is the UK’s progress on the Brexit negotiations with hopes that trade talks will not be delayed. Chancellor Philip Hammond strengthened earlier hints that the Brexit financial bill is being discussed, saying that the UK is “on the brink of making some serious movement forward in our negotiations with the EU, and starting to unlock that logjam so that people can see clarity about the future.”

On Wednesday, the Chancellor delivers his Autumn Budget which is expected to feature spending to improve productivity. The Business Secretary Greg Clark said today that the government plans to spend £1.7 billion to improve transport links in city regions and boost public and private research and development investment. He also said that a new industrial strategy will be published next week. Clark wants to send a message to businesses that the UK is “the best place in the world to develop new technologies.”

US Dollar – US Markets

The US Dollar lost 0.48% against the Pound, exchanging at $1.32. The Dollar also slipped against the Euro, trading at $1.17. The US Dollar Index (DXY) is down by 0.2%, coming in at 93.69.

The US Federal Reserve Bank (Fed) is in focus this week: tomorrow, when Fed Chair Janet Yellen speaks at New York University, and on Wednesday, when the minutes of the Fed’s latest policy meeting will be scrutinised by the global markets for signs that the officials will deliver the widely expected December interest rate hike.

On Friday, the release of US Census bureau data showed a sharp increase in new home construction in October. New Housing Starts spiked to a 13.7% increase from September after three months of decline caused by the impacts of summer hurricanes. The annualised rate surpassed expectations, coming in at 1.29 million, higher than the predicted 1.19 million. New Home Permits increased by 5.9%, which is another indication that the US housing industry is expanding and the economy is strengthening.

The week ahead for US economic data will be otherwise fairly lowkey, due to the US Thanksgiving holiday on Thursday. Other than the likelihood of a December interest rate hike, the only other scheduled high tier data is Friday’s US Markit Manufacturing and Services Purchasing Managers Indices for November. These are likely to come in slightly higher, reinforcing any strength the Dollar may have after the Federal policy meeting minutes are released.

Euro – European Markets

The Euro has been volatile today, initially weakening against the Pound; it has recovered earlier losses, exchanging at €1.12. The Euro also slipped and then bounced back against the US Dollar with the exchange rate set at $1.18. The single market currency was strongly impacted by the breakdown of German Chancellor Angela Merkel’s “Jamaica coalition” talks.

The Euro was strengthened after European Central Bank (ECB) President Mario Draghi commented that “the eurozone economy was robust” but the ECB would not rely on the economic growth to increase the pace of monetary policy normalisation. At the Frankfurt European Banking Congress, today, Draghi said, “Despite this progress on the real side of the economy, from a monetary policy perspective our task is not complete, as we have not yet seen a sustained adjustment in the path of inflation.”

Earlier, the Euro fell on news that Angela Merkel was unable to form a three-party coalition government agreement after the centrist Free Democratic Party walked away from a meeting with Merkel and her Christian Democratic Union and the Green Party. This delays the formation of the German government, giving Merkel few easy options. It is unlikely that she will be able to renew a coalition deal with the centre-left Social Democrats, since the Social Democratic Party has repeatedly ruled this out. She could run a minority government that focuses on agreements on individual issues. The Free Democrats have indicated they support this solution. It appears most likely that Merkel will call for a new election which poses little long-term risk to the Euro, although with her leadership weakened the long era of her leadership may be coming to an end.

Other Currencies – Highlights

The Pound has held onto gains against the Australian Dollar, exchanging at 1.75 AUD, today. The Australian Dollar fell last week when unexpectedly weak wage growth indicated that inflation will rise slower than the Reserve Bank of Australia (RBA) had predicted. The RBA has signalled that interest rates will not be raised next July, as had been expected. Rates will now likely stay at the current record lows until early 2019.

Sterling slipped slightly against the New Zealand Dollar, trading at 1.94 NZD. The major data releases due out this week for the Kiwi are expected to slightly weaken the currency. Tomorrow’s Global Dairy Trade Auction sets the prices for dairy products which are vital to the economy. The last auction saw a decrease in prices of 3.5%. On Thursday, 21 November, Retail Sales for the third quarter are predicted to rise by 0.4%, but lower credit card spending for the same period suggests sales will have been lower.

The Pound picked up strength against the Japanese Yen today, exchanging at ¥148. 65. Yesterday’s release of October’s Export data showed that exports increased by 14.0% year-on-year. Exports to China, Japan’s largest trading partner, increased by 26%, compared to the previous year. The increase for the fourth straight month has been Japan’s strongest period of exports since 2008, although the volume is lower than it had been prior to the economic crisis.