Euro slips as Merkel loses support in German election
The Euro was firmly on the back foot during London trading on Monday after the results of Sunday’s general election in Germany prompted investors to sell the currency against both the Dollar and Sterling.
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espite securing her fourth term as Chancellor, the results of this weekend’s election were pretty disappointing for Merkel whose Christian Democratic Union Party put in its worst performance under her leadership. It was also the party’s worst election results since as far back as 1949, obtaining just 33% of the vote versus the 41.5% it achieved at the last election in 2013. Moreover, there was a surge in support for the anti-immigration Alternative for Germany (AfD) Party which won just below 13% of the vote and became the first far right party to win seats in parliament in more than half a century. While this will not significantly impact Germany’s future within the European Union, the rise in populism in the country has provided genuine cause for concerns among investors.

Yesterday we also had a speech from President of the European Central Bank Mario Draghi. Draghi voiced increasing confidence that inflation would return to its target in the Eurozone, although again reiterated that volatility in the exchange rate represents a source for uncertainty. Fellow ECB member Praet will be speaking this afternoon. Friday’s inflation data will be key this week and could give a strong indication as to the likelihood of a tapering in the bank’s QE programme if it surprises to the upside.

Sterling range bound, Fed speakers dominate this week



Currency trading on Monday was actually fairly quiet and void of any significant market moving news. Sterling was fairly range bound yesterday following Theresa May’s speech at the back end of last week that failed to offer any kind of details on the inner workings of the Brexit negotiations. The Pound actually put in its joint weakest performance against the Euro in seven weeks on Friday as investors were left disappointed by May’s lack of clarity.

Federal Reserve member William Dudley spoke on Monday, adding to the recent stream of voices out of the central bank that have called for higher interest rates. Dudley, among the first to speak following last week’s FOMC meeting, claimed that he expected inflation to rise and stabilise around the Fed’s target. He also acknowledged a firming in economic conditions in the US that would warrant gradually increasing interest rates.

We now look ahead to a speech from Federal Reserve Chair Janet Yellen in Cleveland, Ohio this afternoon. Fellow members Mester, Brainard, Bullard and Fischer will be among a host of speakers in a jam packed week of central bank appearances.
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