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Politics are set to drive trading on both sides of the Atlantic as the new week kicks off. Asian equities traded broadly lower on Monday, as investors showed a muted reaction to the US government shutdown. And whilst the US futures are pointing to a softer start for the US equity indices later today, the US dollar is better bid.
The US government shut down at midnight on Friday after the Republicans failed to achieve sufficient votes in the Senate to pass a stop gap spending bill, passed earlier by the house. This means that US government activities will come to a halt, until further funding is approved. There will be a new vote at noon (EST) today. Whilst there are few signs of either the Republicans or the Democrats giving in, amid disagreements over Trump’s immigration policy, this is a blip in the road rather than a long-term factor which will drive the dollar lower. Although, trading cues are likely to stem from Washington, for the first part of the week at least, given the light US economic calendar. However, as the week progresses traders are expected to switch their focus towards the US GDP reading at the end of the week.
The US dollar is up 0.1% in trading overnight against a basket of currencies, holding steady at 90.66. Should the dollar push convincingly above 90.68 (Friday high), then it could push on to 90.98 (high Jan 18).
Germany’s SPD Party Give Green Light to Coalition talks
Politics are also set to take centre stage as the European session opens for the start of the week. The SPD voted on Sunday to formally begin coalition talks with Angela Markel’s CDU party, moving Germany a step closer to ending its four-month political vacuum. Whilst the end of this extended political "no mans land" is clearly good news for Germany, it is also good news for the European Union as a whole. A sympathetic leader was needed in Berlin for there to be any chance of EU leaders, particularly France’s Macron, pushing sweeping reforms across the European Union through.
The relief rally is evident in the Dax, with futures pointing to a jump of over 30 points on the open. The euro also showed early signs of strength gapping up 0.35% on the open, to $1.1270. However, it has been unable to withstand the strength of the dollar in early trading and has since given back the gains. From here the EUR/USD could find near term support at $1.2200.
Macron Envisages a Bespoke Brexit Deal, Boosting Pound
Finally, the pound was not without its own piece of good news. After weak retail sales gave the pound a hammering on Friday, France’s President Macron was on hand over the weekend to give sterling a lift with encouraging Brexit headlines. Following comments by the French President, hopes for a bespoke Brexit trade deal, which sees some access to the single market, are once again gaining strength.
GBP/USD is seen regaining lost ground and climbing back towards last week’s post Brexit highs.
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