(No) confidence neighbours
The vote of no confidence that brought Michel Barnier’s French parliament to the ground is only just in the rear-view mirror. Yesterday, Olaf Scholz’s coalition faced a similar vote paving the way to national elections in Germany. At the same time as we have been commenting upon the economic malaise that has seen Germany’s economy stagnate, we have also highlighted the political infighting that has paralysed Germany’s law making. Following the dismissal of Free Democratic representative and Finance Minister, Christian Lindner, the vote was called eliminating Scholz’s three-party ruling coalition.
Albeit starting from its already heavily discounted position, the Euro didn’t react too heavily to the prospect of national elections. Once the vote was called, much as in France, the result was all but known. Thanks to mixed but overall resilient PMI data from France, Germany and aggregate Eurozone, the Euro managed to hold steady against the Dollar. Select market participants have been observed selling longer duration treasuries meaning that yields remain well supported in the US which could have invited further EURUSD selling if such soft data had been weak.
As we wrote yesterday, it is only a matter of time until the ECB, which has concluded its last meeting for 2024, ramps up the pace of easing with an out-sized cut. Over at the Fed meanwhile, despite tomorrow’s 25-basis point cut all but set in stone, there are expectations of a pause to the current cycle which may come as soon as the January meeting. At the same time, higher terminal rate projections are pushing longer dated yields higher. Cable’s more resilient valuation reflects a similar monetary policy outlook at the BoE but prices will remain sensitive to volatile risk conditions.
Discussion and Analysis by Charles Porter
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