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German coalition uncertainty presents risk to the Euro.

By Hamish Muress

After a busy week last week with the ECB and Federal Reserve meetings, and then a hectic weekend at the World Cup, this evening England finally kick off their World Cup campaign. Similarly this week is also the turn of the Bank of England as they are set to meet on Thursday then release their Monetary Policy Summary. However, the market is not expecting much from the central bank as this isn’t a ‘live’ meeting and no changes or new developments are anticipated and a 7-2 vote split is anticipated with both Ian McCafferty and Michael Saunders dissenting (let’s hope for more action tonight with England in Volgograd, or at least a similar score line). Currently the market is pricing in a 50% chance of an interest rate hike in August however this still seems a step too far for Carney and his colleagues and it is unlikely that anymore Brexit certainty will be in place and the Bank may also wish to wait longer for further developments on the UK economy picking back up.

With regards to Brexit and Brexit headlines this should be the main driving force behind the pound’s performance this week. The EU summit is next week and this will be light on development and details but heavy on rhetoric and posturing.

It is a distinctively quieter week for the US dollar this week following the excitement of the Federal Reserve meeting last Wednesday. Following the ‘blackout’ period prior to this meeting the market now has the opportunity to learn which way the various Fed members lean with both Atlanta President Bostic and San Fran President Williams speaking tonight. It wouldn’t be a normal week without mentioning Trump and trade tariffs (see the Iran football team and Nike) and China could retaliate further.

The trade tariffs from Trump are also set to weigh on the EZ this week with the release of Manufacturing PMIs. There has been a contraction in manufacturing since the start of the year and on each occasion, the figures have failed to meet market expectations. This contraction is probably set to continue and weigh on the EZ as Trump imposes steel and aluminum tariffs on the block.

On the political front a more looming threat to the Euro comes from Germany as Angela Merkel is battling to hold her coalition together as the renewed migrant issue threatens to splinter the CDU/CSU government.

The euro came under severe pressure last week but managed to hold on to the EUR/USD handle of 1.15. The big question for the market this week is whether this development could be the event that break’s this support.

The Aussie dollar is another currency that is feeling the effects of Trump’s tariffs and as such remains under pressure. The Australian economy is heavily dependent and raw material exports to China and as such demand for the Aussie is struggling. The prospect of the June Reserve Bank of Australia minutes tomorrow is unlikely to support the currency either as nothing new is expected.

Apart from tariffs (there’s a theme here) the other driver for the Canadian dollar this week will be oil prices and the OPEC meeting. Oil prices have fallen this morning ahead of Thursday’s meeting and the prospect of Saudi Arabia pushing to increase production, crude oil prices are set to fall followed by the loonie. .

The New Zealand dollar is largely weathering the effects of the global trade war at the moment so the focus instead will be on GDP figures on Wednesday night. Any print above 0.5% could fuel expectations of the Reserve Bank of New Zealand shifting its policy sentiment and in turn demand for the kiwi.