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Euro Extends Decline after German Elections; Oil Jumps to Fresh Multi-Month Highs

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The euro continued to be dogged by concerns about the outcome of the German elections, extending its losses in European trading, while a similarly disappointing election outcome in New Zealand caused the kiwi to be the day's worst performing major currency. The US dollar was firmer as the yen came under pressure after the Japanese prime minister called a snap general election. Oil prices meanwhile rose to fresh highs after major producers said the market was rebalancing.

The prospect of prolonged uncertainty as Angela Merkel and her CDU/CSU alliance try to form a coalition with two smaller parties pulled the single currency deeper into the red in Monday's European session. The stronger-than-expected showing for the far-right anti-immigrant AfD party has reignited fears about the rise of populist parties in Europe, while a potential coalition with the FDP and the Greens could force Merkel to take a tougher stance on further EU integration.

Further weighing on the euro today was weaker-than-expected German business survey data from the Ifo Institute. The Ifo's business climate index missed forecasts of 116.0 to decline to 115.2 in September from the prior 115.9. The current conditions index also missed estimates to fall to 123.6 in September, while the Ifo's expectations index dropped from 107.8 to 107.4.

The euro's woes worsened after ECB President Mario Draghi said that the economic recovery has yet to "translate more convincingly into stronger inflation dynamics". Speaking before the European Parliament's Economic and Monetary Affairs Committee, Draghi added that volatility in the exchange rate was "a source of uncertainty which requires monitoring".

The single currency fell back below the key $1.19 level, hitting a session low of $1.1861. It was also lower against the yen and the pound at 133.27 yen and 0.8788 pounds.

The greenback was unable to retain its Asian session highs against the yen but remained up on the day, and was last trading at 112.20. The dollar index was also firmer to stand at 92.47, up 0.3% from Friday's close. The US currency was supported by relatively hawkish remarks from New York Fed President William Dudley. Speaking at a college in New York, Dudley said he expects inflation to "rise and stabilize around the 2 percent objective over the medium term" as the effect of temporary factors fade and a weaker dollar pushes up import prices.

The yen weakened slightly after the Japanese prime minister, Shinzo Abe, said he will dissolve parliament on September 28 and call early elections in October (slated for the 22nd). Earlier today, Abe announced a fiscal spending package amounting to two trillion yen to stimulate the Japanese economy.

The pound pared back some of Friday's losses when it tumbled after Prime Minister Theresa May's highly anticipated speech on Brexit failed to provide enough clarity on what kind of a deal the UK will be seeking with the EU once it leaves the bloc. However, hopes that the speech has done enough to unblock the stalemate in the negotiations lifted sterling against the dollar today. The pound last traded at $1.3514, down from a session high of $1.3570 but up 0.2% on the day, as the fourth round of talks between the EU and the UK got underway.

The New Zealand dollar was the day's worst performer as an inconclusive election outcome weighed on the currency. Saturday's general election left the country's third largest party, New Zealand First, holding the balance of power as it will have to decide whether it wants to form a government with the ruling National Party or with the opposition Labour. The kiwi fell to a one-week low of $0.7250 during Asian hours but managed to stabilize around $0.7275 by late European trading, though this was still 0.9% lower on the day.

Oil prices resumed their uptrend on Monday as investors became more optimistic about the outlook for the market. On Friday, OPEC and other major oil producers signalled they will likely decide in late 2017/early 2018 whether to extend the current output cap deal but said the market is now "evidently well on its way towards rebalancing." WTI crude hit a 4-month high of $51.43 a barrel but Brent crude fared even better, surging to a 9-month high of $58.05 a barrel.

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