Merkel’s CDU Approve Coalition Deal with SPD – GBP/EUR Exchange Rates Tumble
The Pound Euro (GBP/EUR) exchange rate slipped slightly on Tuesday morning, falling as markets responded to Germany making clear progress towards a renewed ‘grand coalition’ government between the Conservatives (CDU) and the Social Democrats (SPD).
The CDU voted overwhelming in favour of the deal, with 975 party delegates approving the coalition and only 27 voting against it.
It should be noted, however, that many within the party are critical of concessions German Chancellor Angela Merkel made in order to extend her leadership – particularly ceding control of the Finance Ministry to the SPD.
There is, however, a significant hurdle remaining in the form of the SPD’s own vote on the coalition deal, with the result to be announced on the 4th of March.
Many within the SPD do not approve of returning to a coalition with the CDU after last year’s extremely poor election result, but also in terms of policy differences.
Nonetheless, markets are hopeful that a coalition will dispel the possibility of a return to the polls and uncertainty that would surely follow.
Merkel reflected this sentiment in an interview shortly after the CDU vote, stating:
‘Now I can only say to the SPD that I hope many members feel the same responsibility for giving Germany a good government. I think we can achieve a lot together for Germany and its people’.
Pound (GBP) Exchange Rates Supported by Hawkish BoE Prospects
Sterling (GBP) found some support yesterday in the form of surprisingly hawkish comments from Bank of England (BoE) Deputy Governor Dave Ramsden, who asserted that accelerated wage growth in the UK could perhaps justify an increase in the UK’s interest rate sooner rather than later.
This added to the current market fervour for a possible rate hike in May, particularly with the BoE’s Chief Economist, Andy Haldane having hinted at higher interest rates in order to better cut the UK’s ever-high inflation readings.
Despite this news the Pound quickly lost demand on the back of Labour leader Jeremy Corbyn’s latest statement on party policy, with Corbyn calling for the UK to negotiate a new customs union with the EU.
Markets would traditionally like the idea of remaining within the customs union, but this approach directly undermines the attitude of the ruling Tory party, which seeks to obey the will of the electorate and exit the customs union entirely – an option that would also allow the UK to make trade deals with other nations during the transition period.
In this respect Corbyn’s moves were deemed an attempt to outflank the Tory’s, a move that many investors worry could further divide the Conservative Party and potentially harm Theresa May’s leadership.
Pound Euro (GBP/EUR) Exchange Rate Forecast: US Fed Chairman Powell Testimony Imminent
The single largest driver for the Pound Euro (GBP/EUR) exchange rate today will be the Congressional testimony of US Fed Chairman Jerome Powell, with Mr Powell expected to reveal his sentiment and stance on monetary policy, and the state of the US economy.
Analysts in the US have increasingly priced in a rate hike from the US Federal Reserve, with higher-than-expected inflation readings, record-low unemployment rates, rising wage growth and surging private sector confidence all seeming to point towards a rate hike as soon as March.
This would, however, push the bank’s planned rate hikes this year from 3 to 4, a risky prospect that some US Fed Presidents are worried could be too much, too fast, for the US economy.
Nonetheless, if Mr Powell proves hawkish, or indeed optimistic about the renewed strength in the US economy then the US Dollar will likely climb, siphoning demand away from the Euro as it goes.
This could give GBP/EUR a little bit of room to manoeuvre, but Sterling could also be caught in the influence of a rallying ‘Greenback’.