Concern over European relations with US amid Ukraine 'peace talks' and German elections

Good morning

Welcome back after what was a pretty decent weekend.  We felt the warmth of the sun on Saturday, something of a rare treat at this time of year.  Not quite as pleasant now, we have some pretty heavy rain, but as I’m tucked inside my office its less of a concern. 

Over the weekend we had the German elections which saw Merz’s CDU win with 28.6% of the vote, short of the 30% he had hoped and in need of finding a partner for a coalition which should be formed by Easter.  Outgoing Chancellor Scholz’s party, SDP, dropped to third place in the voting with just 16.4%.  Ahead of them for AfD on around 21%, but Merz has already publicly said he will not work with them. 

I do get the concern over parties like AfD but there is no doubting their growing popularity as western countries look at what they regard as unfairness and inequality over immigration.  I do question the use of the ‘far-right’ label.  What makes a party ‘far-right’?  Sometimes it gets used for anything that isn’t left-leaning, but really it seems to go towards anything that has immigration high on their agenda.  I’m not sure that is far right.  I could be wrong of course. 

Merz has already made waves, talking of the need for EU to distance itself from the US, saying Trump is largely indifferent to the fate of Europe and Merz’s goal is to strengthen Europe quickly.  This is a pretty big change of tone in EU/US relations and comes amid some pretty shocking comments from Trump over Ukraine and Zelensky last week which, according to Trump, was Ukraine’s fault.  Talk of further US/Russia discussions on Ukraine this week but notably Ukraine remain missing at the table.

Merz warns NATO is also at risk as a result of Trump’s recent comments.  Europe is on Ukraine’s side and US seems to favour Russia more, although I think this is partly just Trump trying to get a quick end to the invasion to make himself look good, and also as we have seen, for him to access Ukraine’s mineral deposits in return for the billions of dollars of aid already provided by US to Ukraine.  I don’t think peace, nor Ukraine’s minerals, will come as easily as Trump hopes, supporters of Trumps plan does see a deal that commits US to financing and security of Ukraine.  Meanwhile European leaders along with Canada’s Trudeau are in Ukraine on a full show of support on the three year anniversary of the Russian invasion. 

EUR opened higher after the German election result, EURUSD pushing up from 1.0460 to an overnight high around 1.0525, although has since slipped back to 1.0480.  EUR also made small gains against GBP, with GBPEUR trading down from 1.2080 to 1.2050.  The EUR support waned a little on comments from ECBs Villeroy who has said rates could be as low as 2% this summer althgouh ECBs Wunsch has warned against ECB making too many rate cuts without really thinking about it.

Elsewhere, USDJPY has held below 150.00 since Friday afternoon, now 149.30 as talk of further BoJ rate rises pushes Yen higher.  GBPJPY 188.65 as I type.

In sport over the weekend, Spurs managed a third league win in a row for the first time since Dec 2023, a worrying statistic.  Arsenal’s loss to West Hamm, and Liverpool’s win over Man City, has led many to say the title race is over and some bookies have even paid out bets on Liverpool’s title victory.  England beat Scotland in the six nations, although it must be said that England had to rely on the Scottish kicker who missed three conversions, any one of which would have given Scotland the win.

England were not so lucky in the cricket, where Australia chased down England decent 351 with 2.5 overs to spare, despite being just 136-4 at one stage.  It was the ninth highest run chase ever recorded.  England will need to up their game in the remaining matches against South Africa and Afghanistan if they have any hope of reaching the semi-finals.

Plenty of BoE officials speaking today.  GBP has been reasonably stable, GBPUSD did trade up to 1.2690 overnight but is back 1.2635, pretty much where it closed Friday.  German IFO today is overshadowed by the German election news, and EU inflation numbers are likely to have little impact.  Trumps’ speech this evening, following a meeting with Macron, could be the more important event on the calendar today.

-  09.00 German IFO

-  09.00 BoEs Lombardelli speaks

-  10.00 EU HICP

-  11.00 German Buba monthly report

-  11.15 BoEs Pill speaks

-  13.15 BoEs Ramsden speaks

-  18.00 BoEs Dhingra speaks

-  19.00 Trump speaks

-  07.00 German GDP

Keep an eye on German elections this weekend

Good morning

Running a tad late this morning.  My youngest has started boxing and needed a medical before he can fight.  So we went to see the doctor at a boxing evening and ended up staying to watch.  Pretty brutal.  My son is seventeen, very late to be starting any new sport, let alone one where people are hitting you.  Ages last night ranged from ten years old up to over twenty years, across various weight classes. 

Fights are pretty short, three rounds of two minutes each, but its full on stuff and you have to be very fit to last the distance.  Anyway, it was gone midnight when we got home, he hadn’t been put off in any way whatsoever, so at some point in the near future he’ll be climbing into the ring for a proper bout.  Worried?  Yes, but hey he’s been training hard so only fair he goes the next step.  Who knows, maybe we have the next Joe Calzaghe in our midst. 

Anyway, that’s my excuse for being a bit late.  So I’ll keep it brief(ish).  USD had another spell of weakness overnight, GBPUSD pushed to a high of almost 1.2680 overnight and then tried again to hit those highs after this mornings UK retail sales headline numbers came in well above expectations.  However, downward revisions to the previous months data took the shine off the numbers, GBPUSD slipped to 1.2650, now 1.2665. 

UK government finance numbers have also been released, a major UK bank highlighting the £15.4bn surplus in January might look great but it is actually £5bn less than OBR had projected back in October.  Revisions to previous numbers don’t look great either, taking the cumulative number to £118.2bn, some £12.8bn more than OBR had forecast.

EURUSD followed a similar path, trading up just above 1.0500 overnight before dropping sharply this morning to 1.0470, now ten pips off those lows.  This leaves GBPEUR higher at 1.2080, this mornings EU PMI numbers came in a touch below expectations but has had little market impact.  As I mentioned yesterday, elections are taking place in Germany this weekend, we should know the results by the market open Sunday night.

The USD weakness comes despite the ongoing message from Fed officials that the 2% inflation target is still some way off and that Fed are in no rush at all to cut rates.  I’d really think such comments would at least slow the USD decline, however with UK and EU also seemingly slowing rate cuts perhaps the impact of stable US rates is less than i’d have expected.  Indeed, i’ve seen an upside trade recommendation for GBPUSD, very much technical based but its more interesting as it’s the first I have seen for a long time.  Upside GBPCHF was also mentioned.   

Overnight Japan inflation numbers sent USDJPY down to 149.30, helped in no small part by the already weakening USD. Since those lows it has staged a pretty decent recovery, now 150.40, a further break lower could well be possible with half an eye on the Sept 24 lows of just below 140.00, however I won’t be chasing this one lower.   

Ukraine peace talks taking a lot of the headlines as you’d expect.  Difficult to work out what the US are really thinking, they have said they don’t want to see phrases such as ‘Russian aggression’ in a G7 communique on Ukraine, which is pretty incredible given Russian was the country that invaded and thereby started the war.  US still seem set on ensuring they have access to Ukraine minerals as well, again an odd way to come at peace talks.

To sport over the weekend, Preimer league action sees Spurs take on Ipswich, another must-win match for Spurs, while other key matches sees Aston Villa host Chelsea, the main event surely Man City v Liverpool on Sunday afternoon.  Six nations rugby returns, England take on Scotland at Twickenham on Saturday, always guaranteed to be a lively affair.  My eldest is going to that, not quite sure where my ticket is!

Any finally, a lot of talk today over dangerous sports such as boxing, but who would have known that kayaking presents huge risks that we perhaps wouldn’t expect.  However earlier this week videos emerged of a kayaker in the sea being swallowed whole by a whale, only to then be spat out some thirty seconds or so later.  That’s a story not many people get to tell.

Have a great weekend as and when it comes…

-  09.00 EU manufacturing, services PMIs

-  09.30 UK S&P manufacturing, services PMIs

-  13.30 CAD retail sales

-  14.30 ECBs Lane speaks

-  14.45 S&P manufacturing, services PMIs

-  15.00 US Michigan sentiment survey, existing home sales

-  16.30 Feds Daly, Jefferson speak

-  18.00 BoCs Macklem speaks

Markets like Trump's China trade deal comments, focus turning to German elections this weekend

Good morning

A brief bout of USD buying took GBPUSD and EURUSD lower into yesterdays London close, reaching 1.2560 and 1.0400 respectively but overnight both pairs have crept higher again, now 1.2605 and 1.0435.  GBPEUR has been pretty unmoved, trading pretty much a 1.2065-1.2080 range for the past day or so and remains within that range at 1.2075.

We’ve seen some decent Yen buying which took USDJPY just below 150.00 around the London open, now 150.25 which outs GBPJPY below 190 at 189.40. The move is put down to some hawkish BoJ talk plus headlines overnight suggesting a US/China trade deal could be possible, which sent the Chinese Yuan a touch higher and USD generally lower. 

Attention is growing on the German elections which take place this weekend after the collapse of the coalition government late last year.  The right wing parties are expected to make gains this time, focus is very much on immigration, although other parties are saying they would refuse to make a coalition with AfD should the opportunity arise.   For now, Merz’s CDU party is leading in the polls but will most likely need to create a coalition with another party and has ruled out AfD as a possible partner.

Plenty of Fed officials speaking again today, they will likely echo comments made recently that while inflation is falling it is still too high and the Fed is in no rush whatsoever to cut rates.  Indeed, the Fed minutes from the last meeting showed a cautious approach and we’ll likely need to see further progress on US inflation numbers before rates are cut again.  Remember last weeks US CPI data was higher than expected which makes Fed rates cuts less and less likely.

Trump has continued his backlash against Ukraine and more specifically Zelensky, who he has called a dictator and has accused of corruption after seeking to keep the ‘gravy-train’ of foreign aid running.  A very noticeable change, perhaps brought on by Zelensky’s rejection of Trumps idea that US will have unending access to Ukraine’s mineral supplies.

We have a pretty long calendar today but its mostly made up of central bank officials speaking.  Japan CPI overnight will be interesting given the Yen move, while early tomorrow morning we’ll have the latest UK retail sales figures.  I tend to be pessimistic when it comes to retail sales numbers and have little reason to change that view this time around.  We’ll see this time tomorrow whether I am right.

Have a great day

-  13.30 US Philly Fed survey, initial jobless claims

-  14.35 Feds Goolsbee speaks

-  15.00 EU consumer confidence

-  16.00 ECBs Nagel speaks

-  17.05 Feds Musalem speaks

-  19.30 Feds Barr speaks

-  21.45 NZ trade balance

-  22.00 Feds Kugler speaks

-  23.30 RBAs Bullock speaks

-  23.50 Japan CPI

-  00.01 UK GfK consumer confidence

-  07.00 UK retail sales