Search ForexCrunch

With the German elections over, attention now focuses on the US debt ceiling. Chancellor Merkel did exceptionally well in the German elections with an estimated 42 per cent of the vote. However, the results leave Merkel’s Christian Democrats just short of an overall majority and a protracted period of coalition building lies ahead.

The reaction in the markets has been fairly muted with both the Euro and the German Dax index slightly weaker this morning. Concerns that the new coalition will mean a move towards the left and issues such as a bank transaction tax could be introduced as well as an increase in the rate of tax for high earners.

Volatility in the markets will now be determined by how President Obama and Congress deal with the debt ceiling. Without a budget deal by October 1st 2013, a shutdown becomes a real possibility. National debt is now 73% of GDP in the US and the federal budget cannot continue to be sustained indefinitely at this level.

On Saturday President Obama said that he won’t negotiate with the Republicans over the debt ceiling, he accused them of threatening to plunge the US into default and back into recession.

However, even if a deal is agreed to raise the debt ceiling, it is likely that this will have to re-negotiated by mid-December.

We are in for a long period of volatility in both the equity and FX markets over the next few weeks. Economic data coming out of Europe is starting to show signs of recovery with Eurozone PMI figures released today much better than expected and both French and German PMI impressing. However, unemployment remains a major concern for much of the Eurozone -especially in Greece, Italy, Portugal and Spain. Geo-political concerns are still a major issue even if news is quiet on that front. The recent horrific terrorist attack in Kenya also demonstrates that global terrorism is still prevalent.

The recent weakness over the last couple of months in the US dollar against both the Euro and Sterling seems to ignore many of the factors listed above and a sudden reversal of the US dollar should not be ignored especially as the greenback remains the “safe haven” currency of the world.

Further reading:  Bullard gives something for the dollar bulls – Octaper coming?