Markets watch cautiously as Germany goes to the polls
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Daily Currency Update
As Germany heads to the polls this week, the message from investors is crystal clear, it is the one big European economy with room to spend more to boost economic growth and it won’t be punished by financial markets if it chooses to do so. Germany's once mighty economy has flatlined since 2019 with other Euro countries posting growth in excess of 5% and the US a staggering 11%. With US tariffs looming large, it is clear the coalition need to relax their "debt brake" and spend.The Pound rose to its strongest level vs the Dollar last week as UK Gross Domestic Product (GDP) rose by 0.1% which lent support for the Pound. That said, the outlook for the UK economy is mixed as growth flatlined in the second half of last year combined with elevated inflation, high mortgage rates and a worrisome tax burden. Markets presently expect 60 basis points of cuts in UK interest rates this year but, the Monetary Policy Council (MPC) have made it clear any rate cuts will still be data dependant.
In the US, the Commerce department said retail sales in the US dropped 0.9% last month which is the biggest decrease since March 2023. Analysts suggested rising prices and tariff uncertainty may have caused consumers to tighten spending. Adding to the Federal Reserve’s woes, factory output dipped 0.1% last month which was fuelled by a sharp drop in motor vehicle output. As a result market expectations for a 25 basis cut in borrowing costs crept back up to 51.3% when the Fed meet this coming June.
Key Movers
The single currency is likely to cement gains made last week after Eurozone GDP rose 0.9% which matched market expectations. However, dialogue sharpened as the EU commission said that reciprocal tariffs implemented by the US are “a step in the wrong direction”. They added that the EU remains committed to an open and predictable trading system that benefits everyone but the commission also said that they would act “firmly and immediately against unjustified barriers to free and fair trade”.In the UK, the Pound received support after cautious remarks from the Bank of England’s chief economist, Huw Pill, who said that policymakers should “be careful when they consider the speed and depth of expected rate cuts this year". This was echoed by BoE official, Meghan Greene, who said she believes it is “appropriate to maintain a cautious and gradual approach when the committee considers removing monetary restrictiveness". Tomorrow sees BoE Governor, Andrew Bailey, conducting a fireside chat discussing openness in financial markets and the role of central banks.
US markets are closed today in observance of Presidents day. It is expected that the Dollar will remain on the back foot after President Trump rowed back on imposing tariffs suggesting that if countries are willing to reciprocate with the US there may be a possibility to negotiate. Separately markets will look to employment data due later this week for clues on how the US economy is faring and this will likely decide the direction the Dollar takes.
Expected Ranges
- GBP/USD: 1.2570 - 1.2610 ▼
- GBP/EUR: 1.1980 - 1.2015 ▼
- GBP/AUD: 1.9755 - 1.9805 ▼
- EUR/USD: 1.0470 - 1.0515 ▼