Exchange Rate Forecast

Exchange rate forecasts and foreign currency news

German Coalition Talks Delicate

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It’s thought amongst different political observers in Germany that the talks have not progressed at a sufficient pace and there is unlikely to be a coalition formed before the 1st April.

The three major parties around the table just appear to be looking for different things, with radical changes on how the Government makes decisions being a focus.

Angela Merkel is still the leader of the largest majority however the opinion polls before the German election last year saw nearly half the country suggest she was not fit to lead.

Germany is the main powerhouse of the Eurozone with European issues one of the main factors even in domestic politics. The bailouts of Greece and Italy have essentially come from German funding and when the UK leaves the EU Germany may well be left picking up the bill.

Martin Shulz who leads the Social Democratic Party, who finished second, called for the next German Government to be tough on the UK and not give ground. It’s worth noting also following his previous coalition with Merkel he refused to join parties again, but changed his mind to protect the EU’s interest (last year he was President of the European Parliament).

As of yet German talks don’t appear to be playing too much on investors minds as economic performance remains strong in the Bloc, but as different opinions domestically form on Germany’s role in the EU the Euro could start to suffer from uncertainty.

Eurozone Economic Data Tomorrow

Tomorrow Gross Domestic Product (GDP) data, Consumer Confidence and Business Confidence data will be released for the EU. The GDP data for quarter four is expected to stay at the same level at the previous quarter. The Consumer and Business Confidence readings are expected to remain near record levels, which last year was one of the highlights of the Eurozone’s economy.

At the moment the Euro continues to trade at good levels against Sterling and multi-month high levels against the US Dollar. However, in my opinion the EU’s method of sweeping problems under the rug cannot continue and the Euro could start to give up last years gains.

Sterling buoyed by rumours that Spain and the Netherlands were open to a soft Brexit

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According to reports today, sources are claiming that the Foreign Ministers from each country had independently agreed to work with each other to maintain a deal that would benefit both the UK and EU. Despite these positive rumours the Euro remained strong against Sterling following reports that the European Central Bank (ECB) was ready to unwind it’s Quantitative Easing (QE) program this year and was also further strengthened by the news that after months of political uncertainty Germany had finalized a coalition deal to form a Goverment.

Despite not making too much headway against the Euro, Sterling did manage a positive run against the US Dollar. US Producer Price Index data released this afternoon revealed that inflation may not pick up as suggested and was further compounded when Federal Reserve member Bostic said he cannot see the Federal Reserve raising interest rates three times in 2018. This has helped to boost GBP/USD exchange rates to pre-referendum levels.

What to look out for next week

Given that Sterling has been driven by international affairs for the majority of this week, attention now turns to domestic data once more. Next week’s primary focus will be December’s Consumer Price Index report and Retail Sales data, which give a detailed insight into consumer spending and household income levels.

Inflation in the UK is currently sat at 3.1%, overshooting the Bank of England’s target of 2%. These figures are likely to be heavily scrutinised, as policymakers are likely to get uncomfortable if the current level of inflation in the UK stays at this level for too long.

Despite a busy and influential week for data next week, the biggest mover of GBP exchange rates will remain to be Brexit. As the bill makes it way through Parliament I would expect key figures to have their say which will ultimately move Sterling. Interesting times for anyone currently holding Sterling.

Euro weakens as Germany plans second election

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German Chancellor Angela Merkel has failed in her attempts to form a coalition, which now leaves the political situation in Germany in quite a dire position. The last few weeks have been spent around the negotiating table but have not managed to produce any results. What this does now mean is that Germany will go back to the polling stations to see if there will be a different outcome.

The third biggest political party in Germany is a far-right group which received a significant boost in the last election and there may be concerns that their gains could be increased in another election. Most of the problems surrounding German politics has come from an immigration policy which saw 1 million refugees being let into the country. Angela Merkel has struggled ever since that decision and this latest set-back is being billed as the potential end of her reign in charge of the nation.

The effect of an election on exchange rates

Elections create enormous volatility for the host currency which in this case will affect the whole Eurozone. Germany is the engine room for the single currency and one of only 4 net contributors once the UK leaves. Political turmoil and uncertainty could have a drastic effect on the Euro and result in a multitude of losses.

Should a second election be called I wouldn’t be surprised to see immediate 2-3% losses for the Euro taking the GBP/EUR exchange rate back above 1.15 for the first time in nearly half a year. Furthermore, the outcome of a German election could put an untested leader or party in charge which would be likely to test investors nerves. Angela Merkel has also been a major influencer in the European Union, being one of the EU’s biggest advocates. Should the next leader not hold the same opinion as Merkel there is every chance as the EU’s biggest contributor could put the Union at risk of major change. Whilst this seems like a domestic issue the total fallout could be much wider reaching, either way the Euro could come under major pressure for the first time in a long time.