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Political uncertainty keeps investors on edge

European markets struggled for gains yesterday while the euro slid back as investors sought to decipher how the weekend’s political events in Germany would unfold in the weeks and months ahead.

With the SPD ruling themselves out of another coalition with Angela Merkel’s CDU/CSU the only remaining option would appear to be an unlikely coalition with the FDP and the Greens, or failing that the prospect of new elections. Short of a Merkel defeat last weekend’s events couldn’t really have been much worse from a political stability point of view as the populist AfD became the third largest party in the German parliament.

In any event the prospect of a quick resolution appears unlikely given that there is a state election in Lower Saxony next month which is expected to take priority. This is likely to mean that any progress on the subject of EU reform will be well down on the list of priorities for a new government, while the various parties attempt to come to a compromise that transcends the differing political priorities of each. There is also the prospect that a failure to reach agreement could well raise the prospect of new elections, increasing uncertainty at a time when geopolitical tensions appear to be on the rise again.

Aside from tensions in Spain as the Spanish government continues with its ham-fisted and heavy handed approach to the Catalonian referendum, we’ve seen crude oil prices break higher, on expectations of increasing demand as well as rising tension due to the backdrop of the Kurdish independence referendum, has seen Brent prices hit their highest level since July 2015.

Prices were also helped on their way by the surprising claim by North Korea that the US had declared war on it which saw risk aversion trades pick up in the afternoon session, also pulling gold prices off one month lows.

The claim by North Korea foreign minister Ri that the US had unilaterally declared war on it at the weekend may seem ludicrous, however the claim that they reserved the right to shoot down US bombers in international air space should be taken seriously as the North Koreans do have form in this area for provocation.

In 2010 the North Koreans shelled Yeonpyeong Island in South Korea as well as allegedly sinking a South Korean warship trying to provoke a reaction, however the various protagonists back then were probably slightly more predictable, in the form of President Obama and Kim Jong-il, Kim Jong-un’s father.

US markets also slipped back yesterday, closing lower, partly on the back of some risk aversion but also as a result of a big sell-off in the tech sector, which saw Facebook, Netflix and Apple all decline sharply.

EURUSD – continues to trade in a box range between the mid 1.2000’s and the recent lows at 1.1820, with the potential for a possible triple top, and a 250 point break out. A break below the 1.1800 area is likely to prompt further weakness towards the 1.1600 area, while a move through 1.2100 targets 1.2350.

GBPUSD – current sterling weakness could drift towards the 100 week MA just below the 1.3400 level, but as long as we hold above here the risk remains to the upside back to the highs last week at 1.3660. A move through this level could see a move towards 1.3755, on the way to a move towards the 1.4000 area.

EURGBP – the 200 day MA around the 0.8700 area remains the next target while below this week’s high at 0.8900. A break of the support area around the 0.8770/80 area, could well be the catalyst for just such a move. 

USDJPY – the failure at trend line resistance at 112.90 from the highs this year has seen the US dollar drift back and we could drift lower on a break below the 111.30 area, towards the 110.20 level.

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