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Foreign exchange markets have begun the week digesting a double act of European political developments. While the German election has finally reached a conclusion – with a grand coalition formed between Chancellor Merkel’s CDU/CSU and the opposition SPD for the second consecutive term – another protracted coalition negotiation may be about to begin.
With no outright winner of the weekend’s election in Italy, it now falls upon the Five Star Movement, the populist party that won the largest share of votes with 32%, to form a coalition. Despite previously ruling out the possibility of working with other parties to form a government, it now seems as though a coalition is the only possible outcome, save for an election re-run.
The other big winner from the election was the fellow populist and Eurosceptic League party (formerly ‘Northern League’). Although the party was a member of former PM Berlusconi’s centre-right coalition, it vastly outperformed its peers to claim the biggest share of the vote from the alliance. As a result, it wields considerably more power than Berlusconi’s Forza Italia.
Furthermore, with both Five Star and the League maintaining similar hostile positions on both the EU and immigration, the potential for an anti-EU coalition to head the Eurozone’s third largest economy has understandably seen the Euro retreat from last week’s highs. Whether the two sides, both relatively inexperienced in broking alliances, can find common ground when the dust begins to settle will be crucial to the future of Italian politics.
As if that wasn’t enough for Euro watchers, this week also sees the latest meeting of the European Central Bank’s monetary policy council on Thursday. Although some talk of updating the bank’s quantitive easing was mooted over the past few weeks, Reuters now reports that only a minimal tweak to the language of policy will be made with no major announcements on policy.
Instead, they will adopt a wait-and-see approach given recent market turbulence and a slight retreat in inflation, with the Summer now expected to host the all-important meeting to alter its current policy course.
It was Brexit that dominated the airwaves last week for Sterling, but hopes of some respite are unlikely as the UK continues to prepare for its departure from the EU. With just two weeks left until the halfway point of Brexit negotiations and a crucial meeting between both sides on 22-23 March, the UK government will be continuing to outline their Brexit strategy throughout the week.
On Monday, Prime Minister Theresa May is expected to make a statement to the House of Commons on the government’s Brexit policy having concluded the six ‘Road to Brexit’ speeches on Friday. Despite a lacklustre response from Sterling to the speech, and amid concerns of a soft Brexit rebellion by MPs, continued soundbites are likely to be produced throughout the week from key government ministers. As always, GBP/EUR will be a key barometer of market expectations of a successful Brexit.
Finally, the US dollar will be at the mercy of a range of Fed speakers in the early part of the week, as well as Friday’s February Jobs Report and the all-important Non-Farm Payrolls print.
A number of FOMC members will parade before the media this week days after their boss Powell appeared before Congress, including voters Dudley (NY Fed head – Tuesday, 12:30pm; Wednesday, 12:30pm & 1:20pm) and Brainard (notable dove – Wednesday; 12am).
Looking at the data, although expectations are for a minimal change to the headline NFP print, traders may pay more attention to the Average Wage figures, especially given concerns about rising inflation increasing the possibility of the Federal Reserve hiking interest rates further and farther.
A hotter than expected print could reproduce the market volatility seen in February as lightning strikes twice, although a cooling may abate fears of a four-hike Fed in 2018.
Other macroeconomic data of note this week includes US Factory Orders & Durable Goods (3pm), Eurozone Q4 GDP 3rd estimate (Wednesday; 10am), US ADP Employment Change (Weds; 1:15pm), US Trade Balance (Wed; 1:30pm), the Fed Beighe Book (Weds; 7pm), Germany Factory Orders & Industrial Production (Thursday; 7am), German Trade Balance (Friday; 7am), UK Trade Balance & Manufacturing Production (Fri; 9:30am) and the UK NIESR GDP Estimate (Fri; 12pm).
Key data this week (Sign up here to receive our daily live macro-calendar)
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UK Economic Announcements
00:01 BRC Retail Sales
Intl Economic Announcements
15:00 Factory Orders, Durable Goods Orders (US)
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UK Economic Announcements
08:30 Halifax House Prices
Intl Economic Announcements
10:00 GDP (Eurozone)
13:15 ADP Employment Change (US)
13:30 Trade Balance (US)
15:30 Oil Inventories (US)
19:00 Fed Beige Book (US)
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UK Economic Announcements
00:01 RICS House Prices
Intl Economic Announcements
O/N Trade Balance (China)
07:00 Factory Orders, Industrial Production (Germany)
12:45 ECB Monetary Policy Update (Eurozone)
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UK Economic Announcements
09:30 Trade Balance, Manufacturing Production
12:00 NIESR GDP Estimate
Intl Economic Announcements
01:30 Inflation (China)
07:00 Trade Balance (Germany)
13:30 Non-Farm Payrolls, Unemployment, Wages (US)
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