The US dollar is narrowly mixed and is largely consolidating last week’s losses as the market waits for this week’s numerous events that may impact the investment climate. These include the likelihood of the US Senate vote on tax reform, preliminary eurozone November CPI, a vote of confidence (or lack thereof) in the deputy PM in Ireland, Powell’s confirmation hearing as Yellen’s successor, the BOE financial stability report, and stress test, and the latest read on Japanese inflation.
The euro extended last week’s gains (to nearly $1.1960)but is struggling to sustain the gains. It is slipping below the upper Bollinger Band (~$1.935) near midday in Europe. Last week’s low was set last Tuesday near $1.1715 when the US 2-year premium over Germany peaked just shy of 2.50%. It eased for a couple of days, bottoming near 2.42%. It is back to 2.45% now. The 10-year differential poked through 2.00% early last week, fell to about 1.95%, and is firmer today.
The drama in German politics failed to weigh much on the euro, but many see the possibility of a new Grand Coalition as constructive for the single currency. The head of the SPD Schulz will meet with Merkel on Thursday. It is not clear the price Schulz will demand. The SPD has a party conference December 7-9. Schulz, who is supported by the left-wing of the party, was under pressure following the poor campaign and results in the September election. The FDP, which had imploded during the European crisis, has returned to parliament, but only time will tell whether it made a good strategic decision to abandon the coalition talks.
Meanwhile, it looks like a political crisis can be avoided in Ireland. The ongoing police scandal had threatened to topple the government. However, news reports suggest that Prime Minister Varadkar is close to a deal with the head of the opposition to avoid new elections. This comes as the UK was given until December 4 to make progress on the Irish border post-Brexit or risk continued divorce negotiations rather than moving to trade talks. There appears to be a strong consensus among most of Ireland’s political parties that a hard border between Northern Ireland and Ireland is not acceptable. Moreover, it also seems understood that Ireland’s negotiating position is strongest now and may weaken as the negotiations proceed.
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