German domestic politics back in focus as EU battles for survival
Today’s macro highlights:
- GBP - Manufacturing PMI (June)
- EUR - Eurozone Unemployment (May)
- USD - ISM Manufacturing (June)
German domestic politics back in focus as EU battles for survival.
The Pound and Euro ended last week with gains over the US dollar, supported by a raft of factors. An EU migration compromise appeared to have been reached, upward revisions to UK Q1 GDP were reported and we also saw some worrying fractures appearing in US consumer spending data. However, these gains over the greenback are looking difficult to sustain as cracks continue to emerge in the German coalition government. The interior minister wants to see tougher border controls imposed and has said he will resign unless this happens. However this is no normal cabinet level spat, as this could break the alliance between Angela Merkel’s CDU party and the interior minister’s CSU party. The toppling of Angela Merkel’s rule would heap uncertainty on Europe and send investors rushing to the safe haven of the dollar.
We have a scattering of PMI readings in the coming days, but the UK manufacturing print for June kicks off proceedings at 9.30am BST. Anything above 50 points towards expansion here and an upbeat reading is certainly anticipated although it may be a fraction lower than the previous month’s figure of 54.4. With the possibility of a Bank of England rate hike next month very much on the table, readings like this will be closely followed, although in the short term the Pound’s fortunes may well be dictated by how events unfold in Germany.
10am BST sees the publication of Eurozone unemployment data, but unless there’s an unexpected tick higher here, it’s again going to be political rather than economic woes that stand to direct the Euro in the hours ahead. Bear in mind that any deal over German immigration policy could stand to drive the common currency higher - at least in the short term - but once again we’re seeing questions raised over the future direction of the European Union. On the basis that the trading bloc has bounced back before, compromise could well be found once again.
There’s a handful of US economic readings due today although the stand out is perhaps the US ISM Manufacturing print. This forward looking indicator is expected to cool a little from a month ago, but as we saw on Friday cracks are starting to appear in economic growth across the Atlantic. Consumer confidence is ebbing away amidst higher borrowing costs and the imposition of punitive trade tariffs, so any suggestion that this is seeping into business as well could limit the dollar’s progress.
A couple of additional political points worth noting include the fact Lopez Obrador - Mexico’s answer to Jeremy Corbyn - won the country’s general election overnight. The Peso rallied off the back of this news as there’s the expectation of some fiscal prudence here, although the potential for an abrasive relationship with the USA needs to be considered. The week ahead will also be dominated by a key meeting of UK cabinet ministers in a bid to table some meaningful Brexit proposals. It does seem as if the uncertainty here has long been acting as a drag on the Pound, so the point to watch for may well be the idea of meaningful compromise having the ability to lift Sterling a little.
Friday saw the pair put in its best day of gains in over three months, but we’re not seeing these sustained, suggesting downside pressures are still prevailing. UK economic data will be worth watching, but its politics in London, Brussels and Berlin than are proving just as important right now.
The pair also had a stellar day on Friday, posting the biggest day of gains since January but again momentum was quick to evaporate as the German political situation lingers. This sort of uncertainty will do little to help bolster economic growth and in turn could be pushing back the ECB’s winding down of QE.
The pair has drifted lower through the second quarter and although there has been a rebound from Friday’s lows, the Pound does seem to be on the back foot despite the idea that UK monetary policy will tighten before we see any change from the ECB. UK political uncertainty arguably needs to abate if we’re to see a wholesale shift in sentiment.