Political Uncertainty Grips FX on Both Sides of Atlantic

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Market Drivers January 16, 2018
Euro wobbles as coalition talks in danger
UK CPI cooler
Nikkei 1.00% Dax 0.31%
Oil $64/bbl
Gold $1334/oz.
Bitcoin $12000

Europe and Asia:
GBP UK CPI 2.5% vs. 2.6%

North America:
USD Empire Manufacturing 8:30

The euro took a tumble in late Asian trade today after German media reported that coalition talks between Angela Merkel and SPD hit a snag.

So far only the Berlin and Saxony-Anhalt regions have voted against the deal. With opposition coming mainly from East German locales SPD leader Schultz has until Sunday to line up the votes and get the deal done. If the coalition talks fail, EURUSD will no doubt see a gap down open on Sunday, but it hard to say whether the political turmoil will have any long-term impact on the euro itself.

The German economy has been operating very well this year and Ms. Merkel could presumably govern in a minority rule if need be. Still, the uncertainty surrounding the state of German leadership upended the euro rally sending the pair to 1,2220 before finding some support.

Politics will be the driving force behind FX trade on both sides of the Atlantic this week as markets warily eye the budget negotiations in US as well. In early Asia, USDJPY rallied all the way to 110.95 on rumors that US lawmakers may extend the continuing resolution into February as the work to find a compromise on the immigration issue. But until the markets get official word of a deal USDJPY will remain under pressure as the prospect of a US government shutdown will weigh on the pair.

In the UK today the inflation data came in largely in line with core CPI missing slightly at 2.5% vs. 2.6% eyed. The news was generally shrugged off by the market but cable backed off the 1.3800 figure and was trading 1.3765 in morning London dealing.

With US markets back from MLK holiday, activity in North American session should pick up, but with little data on the calendar, FX will likely take its cue from equities and fixed income. After several days of strong price action, some consolidation may be due, but markets remain fundamentally anti-dollar until Washington finds some resolution to it budget deal.

Boris Schlossberg
Managing Director

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