Trump threatens European unity

Today's news headlines:

‘Boris Johnson increases efforts to ditch Brexit backstop’ – Johnson wrote to Donald Tusk to outline why the Irish backstop is ‘inconsistent’ with his British government’s vision for the UK’s future. Johnson called out for alternative arrangements to be made regarding the issue, although did not specify what these could be. Johnson will travel to Paris and Berlin later this week to meet Emmanuel Macron and Angela Merkel to further discuss his Brexit stance. (Financial Times)
‘Germany to test haven demand as ultra-long bond coupon set at 0%’ – Germany will sell two billion Euros worth of 30-year government bonds at auction with a 0% coupon on Wednesday. Germany has previously only sold 0% coupon bonds at 10-year maturities. The latest sale will test the recent boost in demand for safe-haven investments which sent the whole German yield curve negative.

A key alliance

Franco-German relations have a long and rich history which frames their modern-day cooperation on furthering the ideals of European integration. Ranging from unavoidable hostility through to post-war reconciliation and the formation, since 1963, of a ‘special relationship’ – the two nations now face a US President that treats them more like foes than European allies. Donald Trump will land in Europe this week for the G-7 summit and should bring with him an atmosphere of heightened tensions. Trade will certainly be the big issue, but Trump’s already demonstrated his willingness to do battle with European leaders on matters including climate change and the circumnavigation of Iran sanctions.

In all likelihood, the US president will continue to look for future ways to drive a wedge between French President Macron and German Chancellor Merkel. Trade is undeniably a risk to the stability of their relationship, and Trump’s recent comments on future tariffs has the potential to fracture their alliance. Strategically, Trump has petitioned for more access to Europe’s agricultural markets – a red line for the French – and has threatened Germany with tariffs on autos unless he gets it. Actions like this hold the potential to expose and exacerbate differences in the French protectionist outlook and Germany’s reliance on export driven growth. Combined with the fact that the Italian political system is in chaos and there’s still no resolution to Brexit, it’s no-wonder why the Eurozone outlook is looking increasingly bearish. As we’ve seen, trade has been one of the predominant reasons for the deterioration of global economic conditions and the prospect of a full-blown trade war between Europe and the US will only spook markets further into safe-haven assets.

Bottom Line: The way we see it, Trump must tread a fine line between driving France and Germany further apart and strengthening their union with the outlandishness of his actions. Outside of official statements on future cooperation and the likely Trump twitter tirades, the private meetings that will take place between these world leaders will do more to shape forthcoming EU-US relations.

GBP/USD

As the Dollar index approaches year-to-date highs, and fears of a no-deal Brexit grow as PM Johnson seeks backstop changes, the pair is sent lower on London open. Having broken through the 1.21 handle, downward pressure could see the pair trade back towards two-year lows of 1.2015 by the end of the week.

GBP/EUR

Last week’s GBP/EUR rally failed to break above 1.10 and has since dropped back towards 1.09. Weakness in the Euro and the Pound has created a relatively flat pair so far this week. With a light day of data ahead, headlines may be the prime driver in today’s session.

EUR/USD

Last week, the Euro index broke below its 200 daily moving average and has since extended its decline towards two-year lows. Concerns over a slowing Eurozone economy and question marks over ECB stimulus packages have added downward pressure on the pair this week. Following yesterday’s session trading around 1.11, the pair opens London trading testing last week’s low of 1.1066.