German election sends Euro soaring

The economic calendar may be rather thin on the ground, but traders have two rich political stories to pick over as the new week gets underway. German elections have given the incumbent CDU party the edge, whilst Donald Trump’s upending of US domestic policy continues to struggle to make progress. With healthcare reform failing to get through Congress, it’s tax reform that’s next on the block, but confidence is already running thin on his ability to win here. Greenback gains since his election have now been fully reversed and the question is whether it’s equities next.

Fundamental Analysis – German election sends Euro soaring

A comprehensive win for Angela Merkel’s CDU party in Germany’s Saarland has given the common currency something new to cheer, with the result being seen as a precursor of what is to come later in the year. If Ms Merkel can secure a fourth term as Chancellor then this is generally seen as being good for both the common currency and the European project as a whole, at a time when the trading bloc is clearly struggling to find a unified way ahead. Even more significantly, this shows a majority acceptance of the current economic policies that Germany is having to deploy – plus a tacit acceptance of low ECB interest rates. EUR/USD has pushed out to levels not seen since the US elections and the focus will now turn to comments due from various ECB members during the day ahead – their endorsement of the result could provide even more support for the Euro.

Wall Street is on the back foot after the US healthcare reform was shelved and with Donald Trump failing to find the support of the Republican party in Congress, it sets a poor precedent for the roll out of tax reforms, too. Equity index futures are already forecasting losses at the open but it’s worth bearing in mind the scale of what could be seen here. Since the US election almost four months ago, stocks have been on a charge higher with investor blindly pricing in every last bit of good news that could be imagined. If these corporate tax cuts fail to live up to expectations then pretty soon US equity investors are going to be left taking a very close look at the current toppy valuations – and selling down some exposure. There are plenty of profits to be booked.

The dollar is under broad-based pressure in the wake of the lack of consensus amongst US lawmakers, with the dollar index sliding further below the 100 mark. USD/JPY is helping propel this slide, with the pair now back at levels last seen shortly after Trump’s election. We’ve had some low level economic data out of Japan overnight that came in a shade better than expected, but it’s difficult to argue that this move is about the data.

Even the Aussie dollar – beaten down last week off the back of floundering iron ore demand out of China – is posting gains against the greenback, with the pair. We have comments from the RBA’s assistant governor at 11pm GMT today that could provide some fresh direction here, especially if there’s any revision over previous assessments of economic resilience.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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