The Pound has continued its gains against The Euro as news this morning states that The German Government has collapsed. In recent months, the coalition government between The Social Democrats and Liberals have disagreed on many topics and have now failed to agree on the 2025 budget, as well as measures to take the country out of its current stagnation economically. The finance leader for The Liberals has effectively been fired by the Social Democrats Chancellor Olaf Scholz, and he now faces a confidence vote on 15th January. If he were to lose, as many expect then a Snap Election would be called in March, 6 months earlier.
Recent economic data from Germany had been providing some hope of an economic recovery, however a spike in energy prices as well as political uncertainty is looking to undermine business and consumer confidence, again weighing heavy on The Euro.
Moving into today, we’ve also seen The Pound stabilise somewhat against The US Dollar after yesterday’s drop off after The US Election, however we still expect to see some further volatility as developments surrounding the new government and its policies are announced. Especially any concrete commitment on trade tariffs and who exactly will be targeted. This moves us nicely onto two central banks with interest rate decisions this afternoon.
First up, The Bank of England. Today’s rate cut of 25 basis-points has been pretty much pencilled in now for the past few weeks and so there shouldn’t be much movement off the back of this call. More importantly however will be what they decide to do in December as leading up to the budget, all the talk was about a back-to-back rate cut. Since the release of the budget, the path for rate cuts seems to have changed due to the governments plans to increase borrowing and spending which we expect will likely increase inflation, which ultimately would allow The Bank of England to be more cautious.
Later in the session we have The Federal Reserve with their interest rate decision. Again, today’s rate cut of 25 basis-points is all but nailed on. The forward guidance provided by The Federal Reserve will again be of huge importance as we look for any guidance for the back end of this year and early 2025. With Donald Trump winning the election, many analysts believe the Trump administration and policies are geared for upwards inflation trajectory with the trade tariffs and tax cuts. One month prior to the election, a January cut by The Federal Reserve was standing at a 69% probability, however this has now receded to just a 32% chance.
GBP/EUR 1.1987 GBP/USD 1.2907 GBP/AED 4.7440
GBP/AUD 1.9464 GBP/CHF 1.1310 GBP/CAD 1.7920
GBP/NZD 2.1529 EUR/USD 1.0754 GBP/ZAR 22.5670