Merkel’s Fortune Changes

Discussion and Analysis by Charles Porter:

The Pound Sterling, the Euro and, just about, the Dollar have all received a boost this morning. Climbing over their international counterparts, the Pound is being supported by optimism ahead of December’s EU Council summit. Following strong Eurozone soft data, released yesterday morning, the Euro has similarly received a tailwind. This morning’s Centre for Economic Studies ‘ifo’ survey mildly reinforced yesterday’s IHS Markit’s survey index – improving perceptions of Eurozone economies. The Dollar has been hindered by tax reform uncertainty while the Bill faces congress. Recent comments by the Federal Reserve’s central bankers has also undermined the Dollar. Looking ahead, it’s a big day for the South African Rand.

Sterling Update: Summit’s Brewing

On the 14^th December, just a few weeks away, the EU Council will convene in Brussels for a routine summit. However, ahead of the meeting, many expectations have been brewing that the event will, perhaps, be make or break for the medium-term Pound. This morning’s mild appreciation follows a day of losses and profit taking that intensified yesterday afternoon. Yesterday marked the end of 7 days of gains against the US Dollar; an appreciative trend that has been reinvigorated this morning.

The appreciation is thought to be caused by the pricing-in of expectations for December’s meeting. The last summit was an immense success both for the Prime Minister and for the Pound. Praising May’s Florence speech and Brexit assurances, EU Council President, Donald Tusk, generated expectations that December’s meeting would bring about the signal for sufficient first-round progress. December’s meeting is perhaps the most important event left in the 2017 calendar, and already shapes markets.

Euro Briefing: SPDetour; CDU-turn

The Euro was weakened earlier this week by the breakdown of coalition talks in Germany. Just before midnight on Sunday, the Free Democratic Party (FDP) ended the month-long talks with the CDU’s Angela Merkel. Seen as a mild political crisis in Germany, the development meant that the German polity, which has been without effective leadership for exactly two months from today, had little prospect of forming a coalition within the Bundestag. The conclusion was so bleak because the Social Democratic Party (SPD), the previous member of the Grand Coalition and one of Merkel’s two last hopes, had already comprehensively ruled out another grand coalition. This led some to call for Merkel’s resignation and declaration of another election. In turn, the Euro was weakened by a spillover from Germany’s chaos.

However, last night, Martin Schulz’s SPD has agreed to hold talks. The position of Schulz and the SPD is, as yet, still cloudy. However, even the offer to entertain talks is positive for political progress in Germany. This progress has made the Euro a considerable winner this morning when considered in conjunction with yesterday’s optimistic economic soft data. The Euro continues to gain impressive ground against an inhibited US Dollar, trading over 1% higher than at the beginning of this week, above 1.185.

Dollar Briefing: Franklin to Trump

Benjamin Franklin is attributed with the famous quotation that nothing in this life is certain, except death and taxes. 227 years on from the death of the founding father, President Trump certainly does justice to this quotation, making the US and the globe far less certain. However, Trump is also attempting to have his say over Franklin’s inexorable taxation with, at times, questionable success.

Expectations for Trump’s tax reform are positive for a market-based United States and, consequently, the Dollar. While the bill struggles through congress and its success is questioned, the Dollar continues to be inhibited. Moreover, newly dovish US central bank comments are only exacerbating its weakness.

The Days Ahead:

Today, the South African Rand will be impacted by the November revision of key national ratings. Fitch Ratings agency has already released its unchanged ‘junk’ debt status. However, currently teetering on the lowest bound of investment grade by Standard & Poor’s and Moody’s, today’s release will be highly market sensitive.

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