Euro weekly update

Angela Merkel warned ahead of the event that the nationalist AfD (blue) party could do well on Sunday, and so it did, taking 12.6% of the vote. Frau Merkel’s CDU/CSU (black) won a third of the votes, fewer than the last time around and not enough to make it easy for her to form a coalition. The best guess at the moment is that she will join forces with the FDP (yellow) and the Greens (er, green) in a “Jamaica coalition”, named for that nation’s flag. Against the US dollar the euro gapped half a cent lower when trading began in the Far East, but then recovered some ground. Compared with Friday morning the euro was unchanged against sterling and it had lost quarter of a US cent.

Britain’s prime minister delivered her long-awaited speech on Friday, “clarifying” the government’s approach to leaving the European Union. The clarification was somewhat sketchy, especially when it came to financial matters, and the pound was lower after she sat down than it had been before she stood up. Investors liked the idea of a transitional period after Britain’s official leaving date in March 2019 but they were less keen on her reiteration of the mantra that “no deal is better than a bad deal”. Adding insult to injury, the third of the big three ratings agencies, Moody’s, downgraded Britain to AA2, two grades below triple-A.

There was little among the economic data to divert investors’ attention from political developments. Provisional purchasing managers’ index readings from around the euro zone came in ahead of forecast, while those from the States were vaguely disappointing. A decent 0.4% increase in Canadian retail sales was offset by a below-forecast 1.4% inflation reading.

Central bankers in Euroland and the United States offered differing views on the outlook for inflation. It ought not really to matter what they think, given their inability in recent years to call it correctly. However, their thoughts do have a bearing on monetary policy so the dollar went up and the euro lost ground. President Mario Draghi of the European Central Bank offered a different interpretation. Whilst he is “becoming more confident that inflation will eventually head to levels in line with our [2%] inflation aim”, “a very substantial degree of monetary accommodation is still needed”. Therefore, the US dollar strengthened by four fifths of a cent against the euro and sterling added a quarter of a euro cent.

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