Pound to Euro Extends Gains as German Government Collapses

Economic

Summary:

The Pound to Euro exchange rate (GBP/EUR) extended its foothold above 1.20 after the German government collapsed.

After months of disagreement and disfunction within the governing coalition (Greens, Social Democrats and Liberals), Chancellor Olaf Scholz (Social Democrats) fired Finance Minister Christian Lindner (Liberals).

"The parties failed to compromise on the 2025 budget and were also far apart on which measures to take Germany out of its economic stagnation," says Pia Fromlet, Economist for the Euro Area at SEB Bank. Lindner did not want to abandon the debt brake rule (structural deficit of a maximum of 0.35% of GDP per year).

GBP/EUR is up a quarter of a per cent on the day at 1.2034, having rallied 0.60% the day prior on news Donald Trump had won the U.S. Presidential election. Pound to Euro Extends Gains as German Government Collapses_1

Pound to Euro Extends Gains as German Government Collapses_1

Trump's win poses headwinds for the Eurozone owing to his desire to strike a hard bargain on U.S.-EU trade. The political uncertainty in Germany, therefore, couldn't come at a more inopportune time.

Scholz is now facing a confidence vote on January 15 next year, which he will probably lose.

"If that happens, there will be snap elections in March, six months earlier than the regular election. Popular dissatisfaction with the government is widespread and has increased support for the parties on the left and right fringes," says Fromlet.

Investment bank consensus forecasts update: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/EUR.

Recent data from Germany suggests the economy is turning a corner. However, a recent spike in electricity and gas prices, as well as fresh political intrigue, might undermine business and consumer confidence heading into year-end.

Euro exchange rates are still recovering from Donald Trump's and his Republican Party's unexpectedly strong performance in the recently held elections.

Markets affixed an approximate 30% chance of a Trump win accompanied by a 'red sweep' in which the Republicans gained control of the Senate and retained control of the House of Representatives.

Results for the House are still coming in, but there is a 90% chance the Republicans will secure the House and, with it, deliver the sweep that will allow Trump to reign supreme.

"The EUR may suffer disproportionately given a potential trade war with the US; this would be especially untimely for an economy still struggling with weak growth," says a note from HSBC. "A further headwind to activity is untimely and suggests the EUR is likely to remain under selling pressure for now."

Economists think the Eurozone, with its strong trade links with the U.S. and China, is particularly at risk of U.S. tariffs. The UK will be impacted, too, but the judgement is that the hit will be less noticeable.

"The single currency's weakness has been attributed to fears of trade wars, which made life noticeably more difficult for Europe during Trump's last presidency. Then, as now, it could be a double whammy: immediate tariffs on European goods and increased pressure on China, reducing demand in the Middle Kingdom and squeezing German exports there," says Alex Kuptsikevich, Chief Market Analyst at FXPro.

Source: Poundsterlinglive

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JanusHenderson

Economic

Yet another divisive US election looks to have brought Donald Trump back into the White House, defeating Kamala Harris as prediction markets had suggested for some time. In addition, the Republicans have flipped the Senate, taking over 50 seats, and are doing well in the race for control of the House of Representatives, although this remains too close to call for most commentators at the time of writing. This outcome is expected to result in more stimulus for the US economy, although the scale will be dependent on whether Republicans have full control of Congress.

As expected, following such a major event, markets have reacted rapidly ahead of the US opening bell. Futures markets suggest the S&P 500 will open up over 2% and the NASDAQ up 1.7%. However, the standout parts of the US market are the S&P Midcap 400 and Russell 2000 indices, where futures are showing gains of over 4% and 5% respectively. This is unsurprising given the indications that Republicans will look to keep existing tax cuts in place and aim to do more. Perhaps the most surprising outcome so far is the strength of stock markets outside of the US. European and Japanese equities are performing well, and the downside in China is perhaps less than many had feared despite the negative impact of the incoming President’s stance on global trade. The US dollar is seeing strength across the board as markets consider the potential impact of further tariffs on imports and Federal Reserve cuts have been further priced out. US Treasury yields have risen sharply, due to both the continued evolution in interest rate expectations and the potential for higher inflation.

Words into action

Markets are now likely to start thinking about how the rhetoric translates into policy, with every pronouncement in the coming months going to be pored over for hints. With the general view that both parties would continue to run budget deficits, it looks likely that the US economy will remain hooked on the growth high of fiscal stimulus. The effect that this has on the Federal Reserve (Fed) may take some time to become clear as the central bank will be reluctant to take anything into account until there is greater policy clarity.

Markets will need to wait to see whether the Fed is willing and able to push back against a hot economy. The US economy has been performing strongly, as shown by 2.8% annualized growth in the third quarter, and a continued run of positive data surprises. However, with the prospect of fewer interest rate cuts, bond markets already worried about the US debt mountain, and rising long-term Treasury yields, investors need to be careful that higher-for-longer doesn’t start to become a problem for the economy. A soft landing feels broadly priced in, but there are cracks in some areas of the economy that may widen if interest rate cuts do not materialise to a large enough degree. For the moment though, markets are focused on the upsides that come with certainty after an election and the prospect of pro-growth policy.

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ING

Economic

Commodity

Energy – Hurricane Rafael shuts in oil production

Oil prices faced pressure yesterday as the US dollar surged with the clarity of the election results. However, the oil market managed to recover a significant portion of these losses as the trading session progressed.

The impact of a Trump presidency is still uncertain with several opposing forces potentially at play. USD strength is likely to provide headwinds not just to oil but to the broader commodities complex, as we witnessed yesterday. Furthermore, a Trump administration could see an increase in oil and gas leasing on federal land, which had fallen significantly under Biden. However, US supply growth is going to remain largely price-dependent. On the flip side, a Trump presidency also opens the door for a more hawkish US stance against Iran, which could mean stricter enforcement of oil sanctions. Stricter enforcement of sanctions potentially leaves a little more than 1m b/d of oil supply at risk.

Hurricane Rafael in the US Gulf of Mexico continues to put oil and gas supply at risk. According to the Bureau of Safety and Environmental Enforcement (BSEE), a little over 304k b/d of US Gulf of Mexico oil production has been shut in due to the hurricane, while 131 mcf/day of natural gas production has also been shut.

The EIA released its weekly inventory report yesterday which showed that US commercial crude oil inventories increased by 2.15m barrels over the last week, slightly less than the 3.1m barrel build reported by the API the previous day. While refines increased their utilisation rate by 1.4pp over the week, a 1.41m b/d WoW decline in crude oil exports would have helped to contribute to the crude build. Refined products also saw builds over the week with gasoline and distillate stocks increasing by 412k barrels and 2.95m barrels respectively. Implied demand also fell over the week, with implied gasoline and distillates demand falling by 331k b/d and 475k b/d respectively.

Chinese trade data for October released this morning shows that crude oil imports into China remain under pressure with 10.56m b/d of crude imported last month, down 4.9% MoM and 8.7% lower YoY. This leaves cumulative imports so far this year down 3.4% YoY. These numbers will do little to ease Chinese demand concerns.

Metals – Slump on dollar strength as Trump wins election

The metals complex came under pressure yesterday, driven by a stronger dollar and a risk of tariffs after Trump won the US presidential election.

Copper led industrial metals lower, following three days of gains on better-than-expected data from China. Beijing is expected to unveil more support measures later this week at the National People’s Congress Standing Committee meeting. If more fiscal measures are announced, this will likely boost metals prices.

In precious metals, gold also slumped, weighed by a rising dollar. However, while a stronger dollar may act as a headwind for the precious metal, this could be offset by a geopolitical uncertainty that may accompany a Trump presidency. Gold has long been a safe haven asset during times of elevated geopolitical risk.

Trump’s proposed policies, including tariffs and stricter immigration controls, which are inflationary in nature, could limit interest rate cuts from the Fed. A stronger dollar and tighter monetary policy could provide headwinds to gold and industrial metals. Tariffs also provide a downside risk to global growth, which would be negative for industrial metals demand. However, for gold, increased trade friction could add to the precious metal’s haven appeal.

Agriculture – Soybeans fall on China trade uncertainty

CBOT soybean prices initially sold off on the back of the US election outcome with the market down around 2% at one stage yesterday. The concern for soybeans is that they get caught up in any potential trade tensions, like we saw during the trade war under Trump’s previous presidency.

There are reports that Ivory Coast exporters are rejecting truckloads of cocoa beans due to the bad quality of beans, adding fresh supply threats to the global market balance. There are estimates that an average of eight to 10 trucks (35t of each) of cocoa beans have been sent back daily by top bean exporters and grinders over the last two weeks, as beans are full of mould and smaller than usual. Recent data also indicates that bean arrivals at the Ivory Coast ports have dropped week on week, as heavy rainfall last month made it difficult for producers to dry the beans while also delaying harvesting.

The General Statistics Office of Vietnam released trade volume estimates for October which show that coffee shipments rose to 44kt, up 1.5% YoY. However, cumulative coffee exports fell 11.2% YoY to 1.15mt over the first 10 months of the year.

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FOREX.com

Economic

Forex

GBP/USD rises ahead of the BoE & Fed rate decisions

GBP/USD Is recovering from yesterday's sell-off as the dollar gives back some of its post-election rallies and as investors look ahead to the Bank of England and Federal Reserve interest rate decisions.

The BoE is expected to cut interest rates for a second time since 2020, reducing rates by 25 basis points to 4.75%. The move is priced in, and the big question will be whether the central bank signals further rate cuts following the government's budget last week, which is expected to increase inflationary pressures.

Currently, inflation has fallen to 1.7% and wage growth has eased to 4.9%. Following the Budget, the market has reined in rate cut expectations for 2025, down from 4-5 rate cuts to round 2-3. A less dovish-sounding Andrew Bailey could lift the pound.

The USD has fallen back from a four-month high reached yesterday as the Trump trade cools.

The USD had surged following Trump's victory in the elections and the increasing likelihood of a Republican sweep, which would have trump significant authority to push through an expansive agenda on tax cuts and trade tariffs.

The Fed is expected to cut interest rates by 25 basis points to 4.5% to 4.75%. As with the Bank of England, the focus will be on guidance in light of Trump’s return to the White House.

GBP/USD forecast – technical analysis

GBP/USD has fallen 5% from its September high. While the selloff broke below the 1.30 psychological level and the rising trendline dating back to May, the pair remained above the 200 SMA, finding support around 1.2850. It has corrected higher, bringing 1.30 back into focus.

A rise above 1.30 opens the door to 1.3050, and a rise above here creates a higher high.

Sellers will need to take out 1.2850 to extend the selloff to the 200 SMA at 1.2815 and 1.2665, the August low.

GBP/USD, EUR/USD Forecast: Two Trades to Watch_1

EUR/USD recovers from a 4-month low ahead of the Fed

EUR/USD is rising after dropping 2% in the previous session and trades around the one 1.0750 level early in the European session. Although gains in the pair could be limited following Trump's re-election.

Donald Trump and the Republicans are set to take control of both chambers of Congress, providing a strong platform to push through inflationary policies on tax deregulation on trade tariffs.

The U.S. dollar index rose to a four-month high versus its major peers yesterday to 105.44. Today, it trades around 104.90 as U.S. Treasury yields also ease. The market’s reaction points to expectations that the Fed will cut rates at a slower pace.

Today, the Fed is expected to cut rates by 25 basis points, and the focus will be on any clues suggesting that the Fed may skip December's rate cut. The market's pricing is a 70% probability that the Fed will cut again in December; however, this could change if the Fed gives a different steer in light of Trump's election.

Meanwhile, the euro is recovering from sharp declines yesterday amid concerns that Trump's tariffs could cause Europe's fragile growth to stall, and the ECB may be forced to cut interest rates more aggressively in 2025. These worries could limit gains in the EUR.

Today, attention is on eurozone retail sales, which are expected to rise 0.4%, up from 0.2%. ECB president Christine Lagarde is also due to speak on Saturday.

EUR/USD forecast – technical analysis

EUR/USD ran into resistance at the 100 SMA and rebounded lower, breaking below the 200 SMA, 1.08 round number, and the rising trendline dating back to October last year.

The price fell to a low of 1.0680 and has corrected higher, rising above the 1.07 level. It is attempting to retake the rising trend line. A rise above here and 1.08 negates the near-term downtrend and brings the 200 SMA into play at 1.0870.

Failure to retake the rising trendline could see sellers test 1.07, with a break below here opening the door to 1.0660 the June low.

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Glendon

Economic

In a surprising and historic turn, Donald Trump secures another term as President of the United States, having won the 2024 election. His return to office could have far-reaching implications for the U.S. economy. As a businessman-turned-politician, Trump’s economic policies during his first term were characterized by tax cuts, deregulation, and a focus on American manufacturing. With another chance to shape economic policy, his approach could steer the U.S. economy in a different direction compared to the current administration.

In this article, we’ll analyze the potential consequences of Trump’s victory on key aspects of the U.S. economy, including fiscal policy, trade, inflation, job growth, and corporate America.

Tax Policy and Fiscal Stimulus

One of Trump’s signature policy moves during his first term was the Tax Cuts and Jobs Act (TCJA), which significantly lowered the corporate tax rate and provided tax cuts for individuals. If Trump’s 2024 administration follows a similar path, we could see another round of tax cuts aimed at stimulating economic growth. His focus on tax cuts for businesses, particularly large corporations, could attract more investment and encourage hiring.

The tax cuts might also continue to provide a boost to consumer spending, which is crucial for driving GDP growth. However, there are concerns about how such policies will impact the federal deficit and national debt. Some critics argue that while tax cuts can stimulate short-term growth, they often come with long-term fiscal challenges, including rising government borrowing.

Regulation and Deregulation

Trump has long been a champion of deregulation, particularly for the energy, banking, and environmental sectors. During his first term, he rolled back numerous regulations put in place by the Obama administration, claiming they were stifling business growth. In a second term, Trump may push for further deregulation, potentially benefiting industries such as oil and gas, manufacturing, and agriculture.

However, critics of deregulation argue that these policies can lead to environmental degradation, safety risks, and a lack of oversight in critical sectors. In any case, a Trump presidency could likely lead to reduced governmental oversight in many industries, with businesses potentially benefitting from fewer compliance costs and fewer restrictions on operations.

Trade and Global Relations

Trump’s "America First" approach to trade policies was one of the most defining aspects of his first term. He implemented tariffs on a wide range of goods, particularly from China, aiming to address trade imbalances and protect American industries. Under his leadership, the U.S. withdrew from multilateral trade agreements like the Trans-Pacific Partnership (TPP) and renegotiated deals such as NAFTA, resulting in the United States-Mexico-Canada Agreement (USMCA).

With Trump back in office, we could see a return to more protectionist trade policies. The trade war with China, for example, could intensify as Trump seeks to further reduce the U.S. trade deficit. While these policies may benefit certain sectors, such as steel and manufacturing, they could also create disruptions in global supply chains and raise costs for consumers.

Moreover, Trump’s stance on international organizations and alliances is likely to remain confrontational, possibly leading to more trade tensions with Europe, Canada, and other major economic players.

Inflation and Interest Rates

During Trump’s first term, inflation remained relatively low despite significant fiscal stimulus and tax cuts. However, the global economic disruptions caused by the COVID-19 pandemic and the subsequent inflation surge have brought the issue to the forefront in recent years.

If Trump’s policies push for more government spending and tax cuts, there is potential for inflationary pressures to rise, especially if the economy is already operating near full capacity. The Federal Reserve’s role in managing interest rates could become a critical point of tension between Trump and the central bank. In his previous term, Trump frequently criticized the Federal Reserve for raising interest rates, preferring a low-rate environment that supports borrowing and investment.

A second Trump presidency could put pressure on the Fed to maintain low interest rates, potentially stoking inflation further but providing some relief to borrowers.

Job Growth and Labor Market

Trump’s first term saw significant job growth, with unemployment reaching record lows, especially before the pandemic. His economic policies, which prioritized cutting taxes for businesses and reducing regulations, were credited with helping to boost job creation and wages. A focus on revitalizing American manufacturing and energy independence was also central to his 2020 campaign, and it is likely to remain a priority in his second term.

If Trump’s policies succeed in stimulating job growth, this could translate into a strong labor market, with businesses hiring more workers and wages increasing, particularly in sectors like construction, manufacturing, and energy. However, challenges such as labor shortages and automation could still impact certain industries.

Stock Market and Corporate America

Trump’s first term saw strong stock market performance, driven by business-friendly policies, tax cuts, and deregulation. Corporate profits reached record highs, with many companies benefiting from a favorable tax environment and a rising stock market.

In a second term, Trump may continue to pursue policies that are favorable to Wall Street, such as corporate tax cuts and deregulation of financial markets. This could lead to another period of stock market growth, with large corporations and investors benefiting the most.

However, the broader impact on the middle class and working Americans could be more mixed. While the stock market may continue to rise, wealth inequality may become more pronounced, as the top 1% of earners continue to benefit the most from these policies.

Final Thoughts: The Impact on the U.S. Economy

Donald Trump’s 2024 victory is likely to bring significant changes to the U.S. economy, particularly in the areas of tax policy, deregulation, trade, and fiscal stimulus. His business-oriented approach and focus on reducing government intervention in the market could result in economic growth in certain sectors, but also raise concerns about inequality, inflation, and long-term fiscal health.

While Trump’s supporters argue that his policies will continue to drive job creation, reduce government interference, and make the U.S. a more competitive global economic force, critics warn that his approach may lead to increased debt, trade tensions, and environmental challenges.

Ultimately, Trump's second term will offer both opportunities and risks for the U.S. economy. The next few years will be crucial in determining how his policies shape the country's economic landscape and its place in the global economy.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Economic

The Bank of England is set to cut interest rates later Thursday for the second time in three months, as inflation has fallen to its lowest level in more than three years.

However, economists warn that worries about the future path of prices following last week’s tax-raising budget from the new Labour government and the economic impact of U.S. President-elect Donald Trump may limit the number of cuts next year.

For now though, the Bank of England is widely expected to reduce its main interest rate by a quarter of a percentage point to 4.75%. In August, the bank’s nine-member Monetary Policy Committee cut borrowing costs for the first time since the early days of the coronavirus pandemic in the spring of 2020.

Central banks worldwide dramatically increased borrowing costs from near zero during the pandemic when prices started to shoot up, first as a result of supply chain issues built up and then because of Russia’s full-scale invasion of Ukraine, which pushed up energy costs. As inflation rates have recently fallen from multi-decade highs, these central banks started cutting interest rates.

Analysts said that policymakers are likely confident that inflationary pressures in the U.K. economy have eased enough for them to further ease the financial burden on businesses and mortgage holders. In the year to September, inflation stood at 1.7%, its lowest level since April 2021 and below the central bank’s target rate of 2%.

The decision comes a month after Treasury chief Rachel Reeves announced around 70 billion pounds ($90 billion) of extra spending, funded through increased business taxes and borrowing. Economists think that the splurge, coupled with the prospect of businesses cushioning the tax hikes by raising prices, could lead to higher inflation next year.

“The budget won’t change the bank’s decision to cut rates again .... but it does question our long-held view that rate cuts will speed up from now on,” said James Smith, an economist at ING.

The rate decision also comes a day after Trump was declared the winner of the U.S. presidential election. He has indicated that he will cut taxes and introduce tariffs on certain imported goods when he returns to the White House in January. Both policies have the potential to be inflationary both in the U.S. and globally, thereby prompting Bank of England policymakers to keep interest rates higher than initially planned.

The U.S. Federal Reserve is also expected to look past the implications of a second Trump presidency when it concludes its latest policy meeting also on Thursday. Like the Bank of England, the Fed is also expected to lower its main interest rate by a quarter of a percentage point.

Source: AP

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ING

Economic

German industrial production fell by 2.5% month-on-month in September from +2.6% MoM in August. On the year, industrial production is down by almost 5%. The drop was driven by all sectors. Activity in the construction sector fell by more than 1% MoM, after the first tentative signs of bottoming out over the summer months.

At the same time, German exports dropped by 1.7% MoM in September, from +1.5% MoM in August. With imports surging by 2.1% MoM, Germany’s trade surplus narrowed to €17bn from €22.7bn in August.

The zigzagging of German industrial data suggests that German industry has not yet entered a period of full bottoming out. In fact, industrial production in the third quarter was still some 2% down compared with the second quarter.

We now expect a winter recession in Germany

German industry has been the best example of the entire economy’s problems over the last few years: stuck between cyclical and structural headwinds and coming to terms with the fact that the traditional macro business model of cheap energy and easily accessible large export markets is no longer working. This is why four-and-a-half years after the start of the pandemic, German industrial production is still more than 10% below its pre-pandemic level.

Inventories have remained at elevated levels for an unprecedented long time. Still, the stabilising of industrial orders in recent months keeps the hope of at least a weak cyclical rebound in industry alive. At the same time, however, capacity utilisation in manufacturing is at its lowest level since 2020. It's only in food and apparel production where capacity utilisation is currently at historical averages. This is not exactly a flattering picture for an industrial powerhouse.

Looking ahead, the last 24 hours have darkened both the short and long-term outlook for the German economy. A second term in office for Donald Trump in the US with the expected new trade tensions will hit the German economy, which has 10% of its exports going into the US. It doesn’t require a lot of imagination to see US tariffs on European cars sending the German automotive industry into deeper problems.

Uncertainty about US support for Ukraine will not only weigh on investment and consumption prospects but is also an important political topic in Germany. This brings us to last night’s news of a collapse of the German government and possibly new elections in March next year. In the shorter run, this collapse is likely to weigh on sentiment and is likely to hold back investments and consumption. On a more positive note, a new government could, and emphasis is on could not will, finally end the current economic policy paralysis in Germany and provide the country with the long-awaited economic policy certainty and guidance on how to restore growth and competitiveness. The policy prescriptions of deregulation, lower taxes, reducing red tape and investments in infrastructure, digitalisation and education are all very well known. Implementing them without – at least temporarily – deviating from the fiscal debt brake currently looks like an almost impossible challenge.

As a result of these last 24 hours, a technical recession in Germany over the winter has become our base case. Looking beyond the winter, the German growth outlook will heavily depend on the ability of a new government to strengthen the domestic economy amid a potential trade war and even stronger industrial policies in the US.

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