Euro pressured as Germany faces possibility of fresh elections

Angela Merkel the Chancellor will today visit the German President to give him the news that she is unable to form a coalition with the FDP and Greens. This will be a major constitutional blow to the country and the President will be left with an unenviable choice. Either he asks Mrs Merkel to form a minority Government with the Greens or he call fresh elections. If it is the former, the CDU/CSU alliance led by Mrs Merkel will have to make concessions to the Greens over coal mining which will weaken its traditional support from industry and over sustainable energy but still face the possibility of defeats in the Reichstag over wider issues.

Were the President to call fresh elections. It could lead to the premature end (in her eyes) of Mrs Merkel’s political career. This would open a new era of German politics and be sure to create further pressure for the Euro.

The common currency opened lower in Asia as the concerns over fresh elections and a possible further lurch to the fright spooked traders. It reached 1.1722 versus the dollar but has since recovered a little. The pound, facing its own issues has also made ground, reaching 1.1262.

U.K. faced fresh EU Ultimatum

Donald Tusk the EU Council President met U.K. Prime Minister Theresa May for talks on Friday. Tusk’s definition of “talks” seems to be just reiterating the same hackneyed ultimatum that has been in place since March but adding a little urgency. Mrs May has been on a charm offensive over the past few days, talking to EU Heads of Government trying to convince them that progress has been made in talks.

The U.K. has allowed itself to accept that the EU’s requirement for “sufficient progress” in talks could mean anything. It is time the U.K. realized that if the talks on stage two are delayed until March, that will affect the EU businesses who export to the U.K. as much as those U.K. firms moving good in the opposite direction. It will also influence the EU logistical infrastructure that won’t be the same issue in the U.K.

Chancellor Philip Hammond commented over the weekend that the U.K. would be making fresh proposals before the EU summit on 14/15 December, but it is doubtful that anyone is expecting a breakthrough. Mrs May’s comment that the EU need not be worried that the U.K. would not pay “every cent” it owes has become lost since there is a disagreement as to what that figure is.

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U.K. Budget to deal with domestic issues

It is sometimes hard to remember that there is a U.K. economy operating almost behind the scenes of Brexit which is the clear and obvious driver of most Government actions.

Chancellor of the Exchequer Philip Hammond will deliver his Autumn Budget this week and is expected to concentrate on domestic issues with the one exception that he will set aside funds for the possibility of a no-deal Brexit and he will touch upon his expectation for a Hard Brexit which will clearly influence the country’s finances.

Also, this week there are activity indexes issues in the U.S. and EU. Services data has dominated in recent months in America while manufacturing activity has been growing in the Eurozone. Mario Draghi will be making a speech today although he is unlikely to deviate much from the “well-trod path” of easy monetary policy and accommodation if inflation stays benign.

There are also FOMC minutes this week. These should provide a little more advance guidance about a rate hike next month although the inflation picture remains clouded by doubts over where price pressures will come from. ECB minutes will also be released with the volume of concern over future inflation likely to be the only area of interest.

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