German Election Weakens Euro
Angela Merkel is the winner of the German parliamentary elections, but the result is rather disappointing for the CDU party as it only took 33% of the vote. This was the CDU’s worst result since 1949. Social Democrats failed to take more than 21% of the vote. The ultra-right-wing AfD came third and fears of populism from Germany’s past were revived. Merkel will begin negotiations with smaller parties to form a coalition government, with the chance for a second round of elections still present. Investors and traders sold the Euro as the outcome made Merkel weaker and German voters expressed their frustration on immigration policies.
The Pound took advantage of the Euro’s fall, regaining some ground after Friday’s drop. On Friday, Moody’s had downgraded the UK’s credit rating citing fears that Brexit would jeopardise Britain’s medium-term economic strength. Brexit negotiations with the European Union (EU) restart today, with the chief EU negotiator Michel Barnier waiting to hear more details about the plans that Theresa May revealed in her Florence speech.
Pound Sterling – UK Markets
Today, the Pound strengthened against the US Dollar with the exchange rate set at $1.35. Sterling performed very well against the Euro with the exchange rate set at £1.13. The British currency shows its resilience, despite the political and economic uncertainty that makes the UK economy suffer.
The fourth round of negotiations between the EU and British officials is set to start today. Theresa May’s speech in Florence revealed that the British government will honour its financial obligations in exchange for a two-year transitional period post-Brexit. May didn’t go in details, but media sources suggest that the sum of money offered is close to £20bn. The French President Emmanuel Macron said that the EU wants to clarify the issues of the EU citizen rights, the issue of Irish borders and the financial terms of Brexit, before it proceeds with further negotiations.
The BoE published its quarterly Financial Policy Committee (FPC) report, which noted that new bank capital requirements are likely to be introduced, after stress tests in November. The report urges banks to set aside £10bn more in order to be ready to cover potential losses from credit cards and car loans. The FPC thinks that lenders are underestimating the losses they could suffer in the event of an economic downturn, such as Britain falling into recession.
US Dollar – US Markets
The US Dollar inched higher against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY), which measures the value of the Dollar against six major competitor currencies, moved higher at 92.36. The currency’s value increased on news regarding the German elections and because of a quiet weekend on the Korean peninsula.
According to a report by Washington Post, the GOP leaders are examining proposals to slash the corporate tax from 35% to 20%. The report continues, saying that they are also thinking about reducing the top individual income tax rate from 39.6% to 35%. The new tax breaks, if applied, will help upper income US citizens and corporations, in a move that will surely provoke a reaction from the Democrats.
Six top Republican and administration officials are working on the tax framework, among them the House Speaker Paul Ryan and the Treasury Secretary Steven Mnuchin. President Trump is expected to deliver a speech in Indiana on Wednesday, during which he will unveil some details of the tax reform. 95% of the Democrat senators have signed a letter in which they say that they won’t support any reform that adds to the deficit or offers tax breaks to the richest people.
Euro – European Markets
The Euro edged lower against the US Dollar with the exchange rate set at $1.19. The reason for the single market currency’s fall was the result of the German parliamentary elections, in which Angela Merkel and the Christian Democrats (CDU) got the first place, but not the necessary number of MPs to form a government on their own.
The CDU got 33% of the vote, while the Social Democrats (SPD) led by the ex-president of the European Parliament (EP) Martin Schulz secured 21% of the vote. The surprise came from the AfD ultra right-wing party which became the third largest national party, entering the Bundestag for the first time after being founded in 2013. Angela Merkel acknowledged that the result for the CDU wasn’t as good as was anticipated and vowed to listen to the concerns of AfD voters to win them back.
The AfD leader Alexander Gauland, who is a figure that will attract media attention in the coming days, said that Merkel’s actions on the immigration issue should be examined carefully, adding that the AfD will help Germans take their country back in their own hands. In other news, the German IFO business sentiment index recorded an unexpected drop in September. Economists believe that the result indicates a minor decline in GDP growth pace in the third quarter of 2017.
Other Currencies – Highlights
Sterling strengthened against the Australian Dollar, trading at 1.69 AUD. There are no significant domestic data releases this week, which means that the exchange rate might be affected by external factors. According to a report by the Australian Energy Market Operator (AEMO), the next year’s gas supply shortfall in the eastern states could be higher than expected. Prime minister Malcolm Turnbull is expected to limit gas exports in the next days in order to limit the deficit.
The Pound jumped against the New Zealand Dollar, trading at 1.85 NZD. The National Party led by the prime minister Bill English is the winner of the parliamentary election. However, he needs the help of one more political party to form a coalition government. NZ First under Winston Peters will probably assume the role of the “kingmaker”, as political analysts believe that a National Party-NZ First coalition government is the most likely outcome of the negotiations.
Sterling edged up against the Swiss Franc, trading at 1.31 CHF. On Sunday, Swiss citizens voted against proposals made by the government meant to reform the state pension system. The reforms included a rise in the women’s retirement age from 64 to 65 and an increase in pensions.