Tag Archives: Euro

Eurozone Data and the Euro

Discussion and Analysis by Charles Porter:



Data coming out of the Eurozone has been positive and, more often than not, beaten market expectations both when concerning ‘hard’ data from the underlying economy of ‘soft’ data related to sentiment and confidence levels. The Euro, however, has been largely ambivalent throughout these releases. Whilst tax reform, Federal Reserve chairs and monetary policy dominates the US scene, there is one overwhelming Europe-wide factor influencing the Euro: Tomorrow. Tomorrow, the ECB will meet and will likely unveil its grand plan for the future of quantitative easing. Whilst Catalonia and Brexit have put blips on the radar, ECB expectations are what currently drive the Euro.



Two examples:



The release of what are normally two salient data announcements, the Euro-zone Consumer Confidence Index and Markit’s Purchasing Managers Index (PMI), fell almost flat on their face. Released yesterday at 15:00 and today at 09:00 BST respectively, both indices attested to a healthier Eurozone economy. The confidence index still presented low Eurozone consumer confidence in absolute terms. However, the figure not only attests to moderately higher confidence than before, but also showed an above-expectation increase in sentiment.


Similarly, today’s release of Markit’s Purchasing Manager’s Index (PMI) showed an 80-month high for the index. This was moderated by a slight down-turn and under-expectation performance of the sentiment underlying services and ultimately the composite index. Therefore, conflated interpretations in response to today’s release could be understandably attributed to opaque data. Ultimately, however, the strong and more considerable pick up in manufacturing PMI could have been supposed to at least result in a moderate strengthening of the Euro.


The graph below demonstrates the movement within the Euro-Dollar currency cross during these two releases. Within the two respective graphs, the data release point is demarcated by an orange market. Whilst a moderate spike is perceptible during this morning’s PMI announcement, the magnitude of Euro strength is less than 0.03%. Moreover, even if a strengthening of the Euro could be attributed to the soft data release, the upward revision was eroded throughout the day.





The reason for a lack of, certainly soft-, data sensitivity boils down to the anticipation of the ECB’s monetary policy decision tomorrow. Last month, the ECB’s Governing Council chose to hold its accommodative monetary policy unchanged. In a press conference following the press release, Draghi heavily signalled that the Governing Council is likely to have a plan ready for the tapering and eventual removal of quantitative easing by the October meeting. On Thursday 26th October, markets therefore expect major long-term news concerning the likely path of extraordinary monetary policy.


The asset purchase programme of quantitative easing is currently to the tune of €60 billion in addition to the reinvestment of maturing securities that have been purchased previously in the program. Speculation is dominating the Euro, and many European markets in general, with the speed and duration of stimulus tapering very much up in the air. Reassuringly, the scarcity of Eurozone government bonds means that the current pace of debt purchasing is unsustainable. Therefore, news really should be imminent.


The figure that has abounded on news forums, market analyses and interviews is a tapering of 50%, down to €30 billion per month. The level of reinvestment or pace or retraction should also be addressed. Presumably, the tapering will be gradualised to minimise the final cut off of central bank purchasing. Therefore, we look to see how the months-long path to removing quantitative easing stimulus will look.


Any hawkish and larger removal of monetary policy stimulus, i.e. a bigger reduction than 50% of the present net purchasing, will result in greater gains for the Euro. With the balance sheet inflating at the ECB, tomorrow’s decision will be watched with great interest by those exposed to foreign exchange and bond markets. Failing to meet the consensus threshold of quantitative easing tapering will result in losses for the Euro. Monetary stimulus requires an expansion of the money supply and its removal restores a tighter money supply that, with constant demand, raises the price and value of the currency. Significant upside potential and downside risk are present in the Euro.



Day of Reckoning – Catalonia Part 2

Discussion and Analysis by Charles Porter:


This afternoon, the culmination of the Catalonian independence vote may arrive. We analyse the implications within currency markets, predominantly the Euro. In doing so, we offer you an insight into the likely performance of the Euro when it is potentially confronted by a declaration for Catalonian secession later this afternoon.


Evidently, Spain has long given up the Peseta, therefore, the effect of the Catalonian referendum upon exchange rates will be localised within the Euro. Given that the single currency brings about de facto insurance to a national idiosyncratic risk (c.f. Mundell 1973), it is possible that the Euro will show relative ambivalence to any possible announcement at around 5pm BST today. The price behind the Euro is still derived primarily from the supply and demand for the currency, however, the understanding behind the value of a currency union must be based upon its cross-border nature. In effect, while the Catalonian referendum might credibly be of national significance, on the Eurozone grand stage, any national effect resembles only a regional shock.


The effect within Spanish bonds and equities has certainly been felt. Bonds, for example, are paying a higher yield, reflecting the risk and uncertainty that a Catalonian secession from Spain would create. However, overwhelmingly, these national indicators and markets have managed to remain calm and price the risk modestly. Equities of banks exposed to Spain and Catalonia have been more volatile. These banks have even felt it necessary to insure against a Catalonian secession by insuring their ability to physically relocate and, in the meantime, by adapting their legal headquarters.


Whilst our analysis of Carles Puigdemont highlighted his infatuation and belief in Catalonian independence, the constraints that the region’s President faces may precipitate a more moderated response during his speech this afternoon. If the actions taken by Puigdemont are moderate, meaning anything short of a declaration of independence, then I expect a comparable calm within international markets.


If Puigdemont pursues a democratic (or bureaucratic/diplomatic) and conversational approach then the risk that is priced into the market reflecting the uncertainty surrounding the Spanish and Catalonian economies will be partially priced out – allowing the Euro and affected Stocks and Bonds to appreciate. Open democracy, conversation and mutual agreement lead to more gradual, predictable, and stable processes, rewarding bonds, equities and assets tied to both economies with more value. Therefore, the effect upon Catalonian and Spanish equities and bonds will be stabilising; lowering the yield on bonds and raising the price of equities and assets.


However, in the more unlikely, yet plausible, scenario where Carles Puigdemont achieves and submits a signed declaration of independence then further risk will be priced into the market. Capital will leave the areas most affected by political risk, namely Catalonia and Spain, as uncertainty deteriorates the investment environment. However, given that neither Catalonia nor Spain operate using their own, unique, currency, it must be considered whether the common currency, the Euro, will feel the damage.


Whilst the spill over from Catalonia to Spain is inevitable given the analysis within the preceding article, the significance of Catalonia to the Euro is less certain. Accounting for a little over 2% of total Eurozone GDP, Catalonia is not critical to the output and performance of the Euro, but it is also not negligible. Moreover, the longer-lasting potential spill over effect upon both Spanish and Catalonian GDP, should Catalonia become independent and outside the EU, could be strongly negative, particularly if a tariff barrier to trade becomes effective.


The fiscal significance of the Eurozone and European Union is clearly low; the European Budget contributes for expenditure of around only 1% of Eurozone GDP. However, Spain’s net European Budgetary contribution to the EU budget will be distorted and the vacuum must be filled by international compensation, or left to fall. With the prospects for European integration increasing according to the foreign policy and integration stance of French President, Emanuel Macron, political risk and fiscal reshuffling could be damaging and disparaging.


Perhaps the most valuable present feature of the European Union is the world’s largest single market; free of barriers to entry and internal tariffs. The population of Catalonia as a percentage of the total population of the single market is around 1.5%. To some extent at least, the strength of the single market will be minorly diminished. However, the practical impact of a reduction in potential trading individuals will be negligible given the replenished prospect for further EU accession and an undervalued Euro, for example against the pound, spurring the competitiveness of the Eurozone.


The Euro has shown moderate sensitivity to the progression of the Spanish constitutional challenge posed by Catalonia. Regarding the future, highly moderate strength will be conferred upon the Euro if the diplomatic, gradualised, path is taken. Similarly, if unilateral independence is declared this afternoon, the Euro will suffer immediately, and into the trading day tomorrow.



Although moderately shrugged off by the Euro, the end of trading day spike showing Euro weakness is likely to signal a sell off of Euros before the weekend Catalonian referendum on October 1st. This afternoon’s announcement should prove to be more market sensitive, particularly if the status quo is broken and Puigdemont claims Catalonian independence.

Day of Reckoning – Catalonia Part 1

Discussion and Analysis by Charles Porter:


This afternoon, the culmination of the Catalonian independence vote may arrive. We analyse the implications within currency markets, predominantly the Euro. In doing so, we offer you an insight into the likely performance of the Euro when it is potentially confronted by a declaration for Catalonian secession later this afternoon.


While Carles Puigdemont, Catalan President, prepares to address the Catalonian parliament, the tension inside the Spanish political economy is mounting. Following the now 10-day-old referendum on Sunday 1st October, Puigdemont feels he is vested with a mandate to declare the secession of his municipality from Spain.


The uncertainty and conflict that surrounded the initial referendum should impact markets because it signals the propensity for riots and conflict to ensue in response to developments. When Puigdemont addresses parliament, there is an acute risk that the political composition of Spain, including Catalonia, is exposed. What’s more, underlying tensions that are exposed will likely realise their propensity to generate further conflict. Amidst the uncertainty surrounding the extent of devolved powers, particularly policing, pragmatic and responsible public actions cannot be taken for granted.


The Spanish Prime Minister, Mariano Rajoy, has vociferously displayed his unwillingness for Catalonia to leave Spain. Members of the incumbent Spanish ruling party have displayed uncompromising stances towards the Catalonian establishment and public displaying empathy or active support for secession. For example, threats to arrest political public office holders seem credible and are generating concern. It is therefore plausible that convoluted instructions will cause irresponsible public law enforcement, thereby escalating the tension between the nation and the region.


So Why is Spain such a Big Deal?


There are several reasons why Catalonia is pivotal to Spain and, therefore, why Spain is unwilling to allow the nation to secede. These include, but are not limited to, cultural, geographical, economic, and political. Despite a popular desire for secession, the contentious nature of the debate and referendum indicate that many individuals want to remain a part of the Spanish nation and European Union member state. This is likely to be because, ultimately, despite whatever the future holds for both Spain and Catalonia, they have shared an intricate history. The cultural and social ties across the potential border would inevitably be severed.


Geographically, Catalonia occupies much of the affluent border with France. With the Pyrenees creating an impasse across much of the border, the corner access point within Catalonia is critical. The potential to lose an area of strategic geographical significance, both in terms of trade and individual utility, is threatening for Spain. The political will for the nation to remain ultimately harks back to a realist defence of safety in numbers and solidarity with neighbours. The potential divorce of Catalonia from Spain would upset the current status quo of fiscal obligations and arrangements, threatening to stagnate politics and remove critical offices.


Evidently, economic reasoning is argued to be the most salient factor motivating the exaggerated market responses. Representing around 20% of the GDP of Spain with over 7.5 million inhabitants, the significance of Catalonia, from their fiscal contribution to their purchasing capacity, is a highly valuable national economic attribute. The attractions within Catalonia, not least Barcelona, draw high volumes of tourists each year, bringing a boost to the economy of Spain and the surrounding areas.


In part two of this article, we analyse why the Catalonian question is important to the Euro and foreign exchange markets:

Catalonia and the Euro:

Discussion and Analysis by Charles Porter:


It is indisputable that this weekend’s referendum in Catalonia generates considerable headline risk within Europe. The instability, uncertainty, and political risk within the Spanish economy has reflected within nationally sensitive equities and indicators. However, the purchasing power of the Euro, its exchange rate vis-à-vis other currencies, appears to be largely unaffected. The question of whether this relates to a systemic insulation of the Euro, or pure insignificance of the referendum, has a particular importance to those exposed in the Euro.


Opening down against the Pound and the US Dollar, the Catalonian independence referendum might have been supposed to undermine Eurozone solidarity. After all, should the independence of the region be declared, at least the form of the future Spanish and potential Catalonian membership with the Union and single currency should be questioned. However, the significance of the difference before and after this weekend’s referendum was only marginal. Interestingly, the weakness within the Euro against the Pound Sterling has been reversed throughout the morning, up to 10:00 BST.


The result attested to following the controversial referendum generates a considerable mandate for the region’s independence. The threat of a high-productivity and nationally significant region declaring formal independence from Spain creates uncertainty both within the nation and within the region. The uncertainty should be supposed to deter investors from both the region and the nation whilst the taxation revenue and spending distribution is re-evaluated and the future legal political framework of the independent region understood.


This uncertainty has been reflected within Spanish markets. Notably, yields within 10-year Spanish Government bonds has increased by nearly 5% since the close of markets on Friday. The yield on bonds and general debt reflects the inverse of the price of the bond. The yield is the effective return that the bond will pay to the investor and holder of the contract, qualified by its face value. It is clear, therefore, that if the return on a bond increases, it must reflect the risk of holding the contract; the risk of no repayment. Therefore, the increase in the yield of Spanish Government bonds is telling of the political uncertainty and credit-worthiness that the referendum has installed.


The spill over from the referendum was not contained within the sovereign debt market. Spanish equities, particularly banking stocks, were hit by the weekend’s events. The violence and reported atmosphere within Catalonia this weekend should be considered as a strong and concerning phenomenon that has exacerbated the scare within financial markets. Overall, the impact of the referendum has damaged the value surrounding the Spanish economy.


So, why has the Euro not been hit that hard?


Well it is possible that the exchange rate priced in the political risk of the foreseen referendum better than the bond market has. However, this is highly implausible given the transparency and comparability of the free markets of bonds and flexible exchange rates, not to mention their entwinement. Therefore, instead, I suggest that the solidarity within the single currency insulates the single currency from the idiosyncrasies of national concerns.


Naturally, a union of 19 national currencies should not be as responsive as a national currency to an upside or downside event affecting only one nation. Sharing a currency shares exchange rate risk, de facto, without explicit design; a currency union is effectively a fixed exchange rate. Therefore, because the Catalonian risk is unlikely to transmit across borders, at least in the medium run, the deserved foreign purchasing parity of the other 18 economies should, ceteris paribus, be intact. Ultimately, currencies are a conduit for which to facilitate international trade, mobility and engagement. As such they are an excellent indicator of the integrity and strength of an economy. Therefore, the risk that the Catalonian referendum generates is mediated and diversified across the other 18 nations, thereby preserving the value of the Euro.


For the risk averse individual purchasing international currencies, this suggests that the volatility of the Euro to political agendas should be limited. It could be thought, and has been proven to be so, that the US Dollar contains a similar stability and value. This is why these currencies are used, or increasingly used, as reserve currencies; conduits and mediums to preserve wealth as well as facilitate trade. For those seeking exchange rate upside and downside risk, the Euro and Dollar may be unsatisfactory currencies.



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Angela Win; Anglo Win?


Our Foreign Exchange Specialist, Charles Porter, speaks with London School of Economics Associate Professor, Dr. Waltraud Schelkle. Regarding Brexit, we discuss how the passing of the German election may accelerate progress within negotiations as well as the possibility, acceptability and likelihood of a Second EU referendum within the UK. 


Understanding the Brexit process, including the rate of progress and the final outcome, is critical when attempting not to get caught out by foreign exchange markets. Our analysis and opinion allows you to make informed decisions and exploit currency market fluctuations to find the best, unique, solution for you.


In this pursuit, below we have transcribed out interview with Dr. Schelkle from the video, also available on youtube. To convert this analysis of the current Brexit process into a tangible, effective and innovative foreign exchange saving, speak with our specialist and follow our analysis.





Charles Porter, Foreign Exchange Specialist, SGM-FX:


Today SGM joins Dr Waltraud Schlekle, who is Associate Professor of Political Economy here at the London School of Economics. Waltraud has been reading political economy for over eighteen years and it is an honour that she joins us here today.


So as we talk about going down either of these paths, the hypothetical deregulation or conformity outside of the European Union, yet still operating within the Single market; wherever we end up, do you think that the passing of the German election might actually facilitate some progress on the Brexit referendum; the secession process?


Dr. Waltraud Schelkle, Associate Professor, London School of Economics:


No. I happen to think, and what I hear in Germany is, that is, Merkel was briefly trying to be helpful when she saw, and I am afraid people like Boris Johnson do not help you very much. In this, they cannot be trusted, they are unknowing, the government does not know itself what it wants, then Merkel has made up her mind. I think her priority is getting the European Union in better shape. And for that, Britain at the moment is not at all helpful. Only Theresa May, and Theresa May in a strong position; that would be another matter. But the way it has gone, I think we just wait and see and unfortunately the clock is ticking for us who live here, in Britain.


Charles Porter, Foreign Exchange Specialist, SGM-FX:


Of course, so in terms of the European Council’s role: until the end, it might not be that significant. At the moment, it is between Michel Barnier and David Davis in order to start these negotiations. Do you think there is almost an impasse within European institutions that’s blocking Brexit progress at the moment? That’s the reason that I think, maybe, the passion of the German elections will free up European institutions to talk about Brexit.


Dr. Waltraud Schelkle, Associate Professor, London School of Economics:


No, I really don’t think that Germany is blocking anything in particular. I don’t even think there is an impasse, because the Europeans have given clear guidelines to Barnier, it’s very comfortable for him to say, ‘well I am just sticking to my brief’. While Britain has not come up with anything clear and the strategy you could negotiate about and you would see where, then, that the problems lie on the side of the Europeans; I am afraid we are not even there yet to see that!


And this means it’s a completely fantasy world to think that you can do that in the next year or so. I discuss it with my colleagues and they do not agree with me; I would think that we just wade into the next election and then we can have an election campaign, as it should be in a democracy, whether people are still warming to this after the first referendum; whether they still want Brexit. To me, that would be the proper way to do it. But my colleagues say they do not think that it will last that long and it’s half because they will wrap it up one way or another before the election campaign and labour will go with it.


Charles Porter, Foreign Exchange Specialist, SGM-FX:


So to some extent, perhaps, in your view, maybe not your colleague’s, Vince Cable’s Liberal Democrat Party, and their line “having a second referendum once we know more”; that’s not anti-democratic to you? It’s not trying to railroad the first referendum?


Dr. Waltraud Schelkle, Associate Professor, London School of Economics:


No, actually that’s quite a normal scenario. If you look at the history of referenda, a friend of mine has done this; it’s quite often that you a second referendum. Now, I do understand why the British did not announce that from the start: I mean, if you had said to them, oh, yeah, we’ll have a second referendum! I mean, then the European’s have no reason to compromise on anything, right? Just let a hard Brexit be there as a threat and then people may back off. So I do understand this, but, at the same time, it is democratically the proper procedure.


This is what New Zealand recently did with its flag and then decided, in the end, for the status quo. That may happen because it is true, and it is a solid argument to say, yes, people voted for Brexit – yes or no – and the majority said yes; so now we try! But whether there was ever a majority for any of the options you have available after Brexit; that is not clear to me.



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German Elections and Brexit

Our Foreign Exchange Specialist, Charles Porter, speaks with London School of Economics Associate Professor, Dr. Waltraud Schelkle. Regarding Brexit, we discuss how the passing of the German election may accelerate progress within negotiations as well as the possibility, acceptability and likelihood of a Second EU referendum within the UK. 










Understanding the Brexit process, including the rate of progress and the final outcome, is critical when attempting not to get caught out by foreign exchange markets. Our analysis and opinion allows you to make informed decisions and exploit currency market fluctuations to find the best, unique, solution for you.



Macron looks East

Discussion and Analysis by Charles Porter:


It is well known that France’s President Emmanuel Macron is a pro-integration Europhile. In fact, the mandate upon which he assumes government is intrinsically linked with his profile vis-à-vis the European Union and future of the Eurozone economy. Germany is an especially critical member of the Eurozone economy, alongside France. Therefore, the next Chancellor of Germany will have significant consequences for Macron’s Eurozone reform and development program.


Contesting the second round of the French Presidential Election against Marine Le Pen, a staunch Eurosceptic, Emmanuel Macron’s position with respect to Europe took centre stage. His track record and future intentions both dictate a stronger relationship for France with the rest of the Eurozone political economy. The revelation within the Financial Times, therefore, that Emmanuel Macron will attempt to assert immediate influence over the path of Eurozone and European Union integration following the German election is bold, yet expected.


Macron is quoted to be pursuing a ‘a budget of “several percentage points” of GDP’. Although the volume of the future budget remains ambiguous, it still necessarily several times larger than the present budget which fluctuates around 1 percent of EU Gross National Income. Macron’s suggestion is important for both the election and the inevitable subsequent negotiations regarding the composition of the future German government.


A large European budget is requested because it can act as a stabilisation function within the Eurozone economy. This may have the capacity to ensure stability either in good times, by making it a more optimal currency area, or, in bad times, by counteracting the vulnerability and enhancing the flexibility of the single currency. Because the European sovereign debt crisis ultimately centred upon a few countries yet became macroscopic because of the Union, this new provision could prevent future crises.


Macron’s timing is interesting. Clearly not wanting to be accused of election tampering, the article in the Financial Times quotes government officials as wishing to engage with the new German coalition next week, after the vote. However, it would be naïve to think that Macron’s positioning towards Germany, its Eastern neighbour, won’t influence the minds of voters considering the Eurozone a salient political phenomenon, positively or negatively, and concerned, or apathetic, about European harmony.


Chancellor Angela Merkel has already signalled her willingness to work towards Eurozone and Union reform in conjunction with Macron. However, her priorities and motivation for Eurozone reform are more targeted towards tangible benefits thereby creating a disharmony between French and prospective German integration preferences. Crucially, she has consistently expressed an unwillingness to wildly commit fiscal resources towards either the Union or Eurozone economy. Given that whatever the composition of the new Eurozone budget is, Germany will be a highly significant contributor. Therefore, extremely intelligent regulatory design would be necessary to ensure the Germany is not a consistently net creditor. Despite this possibility, political willingness and German voters may preclude Merkel’s Germany from committing to Macron’s reforms.


Martin Schultz, on the other hand, joined the Social Democratic party following his presidency of the European Parliament (EP). An embedded characteristic within the SPD leader is, therefore, European integration. Schultz, when still speaking as the EP president, commented upon the propensity for the secession of the UK from the Union to create an environment where unprecedented integration may take place. The support, or at least ambivalence, of the SPD leader for integration to the degree that Macron envisages means that voters should internalise Schultz’s willingness to pursue such a fund. The present German orientation of the affairs of the French president are therefore highly salient to the election result and the minds of German voters casting their ballot this Sunday.


The implications for the foreign exchange market are extensive. Whilst a large common Eurozone budget is advocated for its influence upon economic stability, currency fluctuations will depend upon market’s perception of the fund. For example, markets may perceive the political impasse that a common budget may create as damaging to European solidarity and extant integration. Should Schultz’s SPD achieve a meaningful role within the German government, the new budget could be more plausible. Therefore, the reaction of markets following this event will, to some extent, reflect the degree of stability, or instability, that the Euro will receive from new European integration.



BoE Carney Speaks to IMF

Discussion and Analysis by Charles Porter:



Last week, the minutes published following the Monetary Policy Committee’s Decision rallied the pound sterling. This event triggered an appreciation of the Pound Sterling contributing to intraweek gains in excess of 3 percent. Moreover, the Hawkish conclusion delivered by Gertjan Vlieghe, a traditionally Dovish Committee member, signalled a sooner-than-expected rate hike that in turn cemented and developed these gains. However, Carney’s speech today was unable to re-value Sterling.


The analysis of Gertjan Vlieghe’s speech reveals that markets reacted strongly to the following inclusion:



“If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.”



The above quotation conforms almost perfectly to the minutes of the Monetary Policy Committee’s minutes-guidance. Sterling appreciated on the back of this speech because it demonstrated Committee-wide concurrence even amongst the more hike-averse members. Therefore, should Carney place more emphasis to an imminent hike or deliver a more Hawkish conclusion, then a further appreciation should be expected to prevail. However, presumably, so long as Carney did not deliver an outstandingly Dovish message, Sterling should maintain its gains and price out any risk of intra-Committee disagreement.


Mark Carney, Governor of the Bank of England, delivered a speech to the International Monetary Fund this afternoon at 16:00 BST. Although offering an abridged version to the Fund and their guests, the full publication was available at 4pm and thus currency market movements after this time should reflect, at least in part, Carney’s speech.


Validating the above expectations, Carney did side with the Monetary Policy Committee, suggesting that:



“As the Committee stated last week […] some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.”



However, the Pound Sterling did not appreciate at all against other currencies, including the Euro and the Dollar. This may perhaps be because Carney did condition against this conclusion:



“Any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent[…]”



Therefore, if markets had, arguably unreasonably, predicted a stronger monetary policy tightening, Carney’s words may have cased investors to sell off the currency. This is because the gains that they anticipated, which derive directly from a higher interest rate, may not be realised. Ultimately, the next monetary policy Decision at the beginning of November will prove, or disprove, the Committee’s intentions to raise interest rates.

Germany’s General Election

Discussion and Analysis by Charles Porter:

Germany will head to the polls on Sunday (24th September). The salience of this election to the Eurozone political economy cannot be understated. This article will guide readers through the consequences of a significant European election given the continent’s underlying social, political and economic currents.


There are numerous and healthy literatures regarding national elections within political, economic and monetary unions. Perhaps the most interesting of which, and the one utilised within this article, is the informal governance aspect of the European Union (EU). This avenue highlights the importance of non-formal rules alongside Members’ obligations and control within the Union.


Given that the Brexit negotiation process has had a less than auspicious dawn, the future Chancellor of Germany alongside the new Bundestag composition, will play a critical role in shaping the departure of the United Kingdom from the EU. Given that insignificant formal progress has been made, future heads of states, not incumbents, will determine the secession agreement. As the winner and composition of government becomes apparent, it will be immensely important to understand how the head of state and supporting government will conduct their affairs within the European Council.


A lot is at stake, therefore, for nations other than Germany at their domestic election. The risk, ultimately, will be measured in least-worst terms. Given that the German electoral backdrop and Brexit decision is persistently framed as a negotiation, even a zero-sum game, there is no prospective leader that will offer a free ride, full of concessions, to the UK when leaving the EU. However, some may not push the UK as a far as others in terms of post-secession contributions and trade prospects.


However, there is one more certain bonus coming the UK’s way following Germany’s general election. The good news for the UK should arrive despite the result and development of the Chancellorship. This phenomenon is availed by the informal governance literature. Two findings suggest that the national pay-out from the EU budget during the year of a national election is 10 percent higher than normal in favour of the economy experiencing an election. More importantly, the period surrounding a salient national election is also marked by regulatory and conversational stagnation.


These findings in conjunction with each other suggest that once the German election is out of the way, there should be less confusion within the European polity and EU institutions. This could facilitate progress with the Brexit process. Notably, the French presidential election also fell within the post-Article 50-declaration period. Therefore, perhaps the deadlock within negotiations will subside and mutually prosperous coalition building and concession granting will prevail.


Comments have abounded that the foreign exchange channel has almost exclusively tracked and responded to the political volatility induced by the Brexit process. This is an interesting conclusion given the enabling characteristic of currencies. Nevertheless, given the apparent exposure of foreign exchange markets to Brexit-related turmoil, good attention should be paid to the forthcoming German election at a time where the British Prime Minister sets forth her vision for the UK.




The Week Ahead

Discussion and Analysis by Charles Porter:


The week that is now behind us has been eventful and tumultuous. One overarching characteristic was a bullish Pound Sterling. Driven by statistics releases and central bank activity, the Pound finished the week trading at its strongest rate against the US Dollar since 23rd June 2016. The intra-week gains for the Pound stand at around 3%. Looking ahead, we await to see whether Mark Carney shares the hiking-sentiment of the rest of the Committee, the Federal Reserve Bank’s Rate Decision and the result of the German general election.


Tuesday began the Pound’s rally, when Sterling jumped by around 0.5% within most currency pairs. The leap was caused by above-expectation and strongly above-target inflation statistics, as measured by the Consumer Price Index, released by the ONS. Despite representing a weakness of the currency in terms of the purchasing power of goods, the currency gained strength as markets priced in a higher probability of an interest rate hike.


Sterling was raised higher against both the Dollar and the Euro following the publication of minutes from the Bank of England’s Monetary Policy Committee on Thursday. Whilst these minutes confirmed a relative consensus against a rate-hike, they did also signal the willingness of the Committee to raise interest rates in the near future should current trends persist. This message was then confirmed by Committee member, Gertjan Vlieghe, in a hawkish conclusion that rallied the Pound.


Similar upside risk will manifest itself on Monday afternoon of next week when the Bank’s Governor, Mark Carney, speaks at the International Monetary Fund. Should Carney confirm, or even accelerate, the Committee’s intention to raise interest rates in the near future, then Sterling should gain an even firmer stronghold. However, the corollary is also true, should Carney establish a more Dovish tone, the expectation-induced currency gains may be eliminated and even reversed.


Perhaps more importantly, Wednesday will see the Federal Reserve Board decide upon interest rate targets within the United States. Whilst a tightening of monetary policy through the avenue of interest rates seems highly unlikely, a plan for curtailing the asset purchase program, quantitative easing, could well be forecasted. Therefore, considerable upside risk may similarly exist within the Dollar, providing the potential to arrest its year-to-date slide within major currency pairs. Clarifications of the Board’s monetary policy positioning should be availed through numerous conferences and speeches by Members.


Not wanting to be left out, Mario Draghi will also speak in Frankfurt. The ECB President’s last two speeches at the Nobel Laureate Meeting, Lindau, and then Federal Reserve Bank, Jackson Hole, have secured strong and lasting gains for the Euro. We will therefore await to see whether the content and normative message within Draghi’s speech can solidify this trend and send the Euro back to its monthly highs.


Perhaps most importantly of all, Germany will hold its general election on Sunday. The resulting Chancellor, decided within the second vote on the ballot, will be critical in determining the path of European integration and Eurozone completion. The political economy of Europe, given Macron’s presidency in France, could paint an optimistic picture for virtuous integration. Therefore, towards the end of the week, all eyes will be turned towards the German election.