The euro has posted losses on Tuesday, continuing the downward trend which marked the Monday session. Currently, EUR/USD is trading at 1.1803, down 0.33% on the day. On the release front, the sole eurozone event, German Import Prices, came in at 0.0%, shy of the forecast of 0.1%. Still, the reading ended a streak of five straight declines. In the US, today’s key indicators are CB Consumer Confidence and New Home Sales. Later in the day, Fed Chair Janet Yellen will speak at an event in Cleveland. On Wednesday, the US will release Core Durable Goods Orders and Pending Home Sales.
Angela Merkel easily won the German election on Sunday, but her win has been described as a “nightmare victory”. This sentiment has pushed the euro downwards, as EUR/USD is currently trading at its lowest level since August 25. Merkel’s CDU won 33 percent of the vote and will be the largest party in parliament, but arduous negotiations await as Merkel will have to cobble together a coalition in order to form a government. The center-left SFD, which won 20 percent of the vote, announced that it will not join the CDU, so Merkel will have to negotiate with smaller parties. The far-right AFD ran on a far-right, anti-immigrant platform, and the party’s surge in support has sent shock waves in Germany and across Europe. The AFD can be ruled out as a coalition partner, which leaves the Greens and the pro-business FDP party as the most likely configuration. However, the FDP has insisted on the powerful finance portfolio and will likely try to reduce German transfer payments to the European Union. These views run counter to Merkel’s vision of taking steps to more closely integrate the European Union, particularly as Britain is on its way out of the club.
Federal Reserve policymakers have been divided over a rate hike in December, which would mark a third rate increase in 2017. With no clear message from the Fed, the markets really don’t know what to expect, and fed futures have priced in a December hike at 55%. On Monday, New York Fed President William Dudley made a strong case to raise rates. Dudley cited a soft US dollar and strong global growth as reasons why inflation would increase and also translate into stronger wage growth. Dudley said he expects inflation to reach the Fed’s target of 2 percent in the “medium term”, and predicted that the Fed would continue to gradually remove monetary accommodation. In last week’s rate statement, the Fed announced that it would reduce its $4.2 trillion balance sheet by $50 billion/mth, starting in October.
