Over the past year, trade tensions have proved such a distraction that we have largely forgotten the profound political change taking place in Europe. Over the weekend, the Irish general election seemed to indicate a shift away from the Varadkar-led Fine Gael party and towards Sinn Fein, the left-wing Irish republican party. With only half of districts reporting, it’s too early to tell just how far the ground has started shifting, but there are already reports that the previous Fine Gael and Fianna Fail coalition is breaking apart. Irrespective of who wins the most seats, no party can form a majority, which begs the question of who can form a coalition.
Angela Merkel was hoping to pass the reins of the Christian Democratic Union party to her former Defence Minister, Annegret Kramp-Karrenbauer, when she steps down as German Chancellor in 2021. However, unfortunately for Merkel, following a precipitous fall in approval ratings since gaining the leadership of the CDU in December 2018, AKK – as she is known to the press – has stepped down. She is notorious for several gaffes, including issues over online censorship, and political losses. Much like Ireland, Germany’s political landscape is unclear, and the way forward is wide open.
Bottom line: Without even considering the strain from the escalating trade dispute between the US and EU, Europe seems to be losing political cohesion. A recent Financial Times article describes a fresh dispute over finances, specifically the hole left when Britain leaves the union. Poor EU countries want wealthier EU countries to absorb a larger proportion of the some 60bn EUR shortfall, hardening entrenched positions for individual country budgets.
The week ahead
Last week, the trade-weighted Sterling index remained range-bound while the US Dollar extended gains, translating to a 2.5% fall in GBP/USD. This morning, Sterling trades just 0.5% away from the lows of its two-month range which coincides with the 100-daily moving average. This combination may provide significant support for Sterling throughout the week. Bank of England (BoE) Governor Mark Carney is due to make one of his last speeches as BoE head on Tuesday afternoon.
Last week, the US Dollar climbed 1.4% on a trade-weighted basis breaking through the 50, 100 and 200 daily moving averages. The move comes as the Coronavirus outbreak keeps safe-haven assets in demand and has been helped by recent strong US economic data. This has created downside risk for the US Dollar if the Coronavirus gets cured quickly. On Tuesday afternoon, Fed Chair Jerome Powell will make a speech on the semi-annual monetary policy report.
The trade-weighted Euro index remains pinned to two-and-a-half year lows amid ongoing weak Eurozone data. The Euro erased gains made at the end of January, falling to the 1.0950 level against the US Dollar for the first time since October 2019. On Tuesday, new European Central Bank (ECB) chief, Christine Lagarde, will speak before European Parliament which may produce some short-term volatility for the Euro.