Euro weekly update – Politics dominates the week

Catalonian independence question answered

There was little news from Europe this week, the potential threat from Catalonian independence has been neutralised for now, somewhat controversially, but any subsequent rise in nationalist sentiment may pose a challenge for the currency in the future. The headline rate of inflation there was unchanged at 1.5% and the “core” index was 1.3% higher on the year. There was no reaction by the euro because Euroland interest rates are nailed to the floor and will remain there for the foreseeable future.

Carney fails to calm the storm
The pound has once again been buffeted by the twin forces of Brexit negotiations and the Bank of England this week. The previous week saw no progress in the negotiations, and there were suggestions that PM Theresa May did not have anything new to offer the EU president when she met with him early this week. In anticipation of a statement by Bank of England governor Mark Carney, the pound rose early in the day, but dipped again as investors appears disappointed at the lack of clear statements in his testimony to the Treasury Select Committee. While he did confirm that a rate increase might be appropriate “in the coming months,” there was no confirmation of when this would take place.

All eyes on the next US Fed Chair
The US inflation figures released at the end of last week were lower than forecast, but this had little impact on the dollar. Investors were primarily looking forward as the time approaches for the nomination of Janet Yellen’s replacement as the new Federal Reserve chair. It seems unlikely that Janet Yellen will serve another term at the Fed. The dollar could be expected to react positively if the new chairperson is seen to have a more hawkish attitude to monetary policy than the current incumbent.

RBA stands firm on interest rates
Down under, the Reserve Bank of Australia (RBA) confirmed that they would not be raising interest rates from the benchmark 1.5% in the foreseeable future. Despite changes on the horizon elsewhere, the RBA stated that moves towards tighter policy by central banks elsewhere “did not have mechanical implications for the setting of policy in Australia”.

New government for New Zealand
It was a big week for New Zealand, but not necessarily a good news week for the New Zealand dollar. The market reacted positively to the Consumer Prices index, which went up by 0.5% in the third quarter, lifting the annual rate of inflation from 1.7% to 1/9%. However, this was short lived and any gains made were given back the same day. The big story is the new coalition government now that. Winston Peters, the leader of the New Zealand First party, has agreed to team up with Labour and the Greens, making Jacinda Ardern the next prime minister in place of Bill English. An an unknown quantity, the market did not react positively to the news and the New Zealand dollar struggled to keep its head above water now that the uncertainty of the election has been followed by more uncertainty in the form of a brand new government.

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