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Merkel in the mire

Merkel in the mire

UK GDP growth for Q1 was revised up to 0.2% from 0.1% previously after revisions to construction data. Service sector and consumer lending data were slightly stronger than expected while the first current account deficit was slightly narrower than expected at £17.7bn. Despite the mixed data, headline GDP figures triggered a shift in interest rate expectations, and the chances of an August rate hike rose to 60% from 50% and Sterling climbed.

EU chief negotiator, Michel Barnier commented that despite progress being made on negotiations, significant disparities remained. The rhetoric was not new and didn’t damage Sterling, although tensions within the government remain as the cabinet attempted to formulate definitive proposals.

Overall, the Pound resisted further Euro advances and, with the benefit of end-of-quarter position adjustments, attempted to break above 1.3200 against the Dollar. Sterling is still down 6% against the Greenback since April, and today’s manufacturing data restarts the UK data cycle.


EURUSD is trading below 1.1630, down on the day. This was after the Euro got an unexpected boost as EU leaders seem to agree on some sort of arrangement on immigration issues last week. EURUSD moved higher by 0.7% on the news. However, EU Chief Negotiator Barnier said that, on Brexit, they have ‘made some progress, but huge and serious divergence remains’.

The political crisis in Germany resumed as Interior Minister Horst Seehofer threatened to resign. The deal that German Chancellor Angela Merkel had struck with her counterparts in the EU Summit lifted the common currency on Friday. It had seemed that her CSU coalition partners were satisfied. However, ongoing discussions over the weekend revealed divisions and the country remains in crisis mode. Merkel, the symbol of stability in Europe’s largest economy, may lose her job if the crisis is not defused.


The US Dollar resumes its rises, mostly related to fresh fears about trade. The risk on sentiment is carrying the Greenback higher across the board. US tariffs on China are set to be imposed on Friday.

The May US core Personal Consumption Expenditures increased by 0.2%, as expected, and the year-on-year rate beat expectations at 2.0% from 1.8% previously and the strongest reading for over five years. There was also a headline rate of 2.3% from 2.0%, above the Fed’s target of 2.0%. The positive inflation data maintained expectations of further Fed interest rate increases and forthcoming data will be watched closely as acceleration from current levels would increase pressure for faster tightening. The Chicago PMI index strengthened to a five-month high of 64.1 from 62.7 with strengthening orders and sustained upward pressure on prices.

After all the positive data, the Dollar was undermined by notable month-end position adjustment causing significant losses and the Euro advanced to highs near 1.1700.

Data to watch:

08:15 CHF Real Retail Sales (YoY) (May)
08:55 EUR Markit Manufacturing PMI (Jun)
09:00 EUR Unemployment (May)
09:00 EUR Markit Manufacturing PMI (Jun)
09:30 GBP Markit Manufacturing PMI (Jun)
10:00 EUR Unemployment Rate (May)
15:00 USD ISM Manufacturing PMI (Jun)
15:00 USD ISM Prices Paid (Jun)
23:00 NZD NZIER Business Confidence (QoQ) (Q2)

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