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Euro slumps to one month low after German election

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27 September 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Euro sank to its lowest level in over a month on Tuesday, suffering from one of its worst days so far this year as investors continued digest the result of Germany’s election over the weekend.

espite securing a fourth term in office, Chancellor Angela Merkel now faces a rather gruelling task of forming a coalition government after a surprisingly poor showing in Sunday’s vote. Merkel’s CDU Party could be forced into considering an unpalatable coalition with the liberal Free Democrats. Germany’s economy has recovered remarkably well of late and the weakened political state has worried investors about the ability of the country to maintain its current pace of expansion.

The lack of a strong government in Europe’s largest economy has also concerned investors regarding the possibility of reform within the Eurozone. Recently appointed French President Emmanuel Macron reaffirmed that he wanted the Eurozone to have its own budget during a highly anticipated speech yesterday. Chair of the Federal Reserve Janet Yellen also spoke on Tuesday, although the market mostly brushed aside her hawkish comments. Yellen voiced wariness about raising interest rates too gradually and that persistently easy monetary policy could hurt financial stability.

Trading today will be dominated by central bank announcements. Federal Reserve member’s Bullard and Brainard will be speaking in the US this evening, as will Bank of Canada Governor Stephen Poloz. The Reserve Bank of New Zealand will also be announcing its latest interest rate decision tonight, although no change in policy is expected.

Pound falls for third day after Moody’s credit downgrade

Sterling roared to a ten week high against a weaker Euro, although lost ground for the third straight session against the Dollar amid a lack of economic news out of the UK economy. In the absence of any major market moving news, investors took profits following the recent bout in the Pound that last week saw the currency rally to its strongest position since the Brexit vote.

There also appears to be somewhat of a concern that the market has priced in too fast a pace of interest rate hikes from the Bank of England following the central bank’s most recent monetary policy meeting. Financial markets are pricing in as much as one hike every six months, despite a relatively underwhelming set of recent economic data that showed the UK economy grew by a mere 0.3% in the second quarter of the year following a similarly disappointing start to 2017.

Last Friday’s credit rating downgrade from Moody’s also may be partly to blame for softness in the Pound this week. Moody’s lowered Britain’s credit rating down one notch to Aa2, claiming that government plans to bring down a heavy debt load had been knocked off course.

Governor of the Bank of England is due to speak just after 9:00 UK time, although in the absence of any economic data whatsoever, the Pound is expected to trade mostly on events elsewhere.