The German Federal Election results recorded a strong performance by Chancellor Merkel’s CDU party with close to 42% of the vote, but fell short of an absolute majority and, with the FDP failing to reach the 5% threshold for seats, Merkel will be forced into an alternative coalition. The most likely outcome is for a deal with the main opposition Social Democrats which could lead to a more moderate policies on the Euro-zone and ironically leaves Merkel in a weaker position. There was further uncertainty surrounding negotiations over another bailout package for Greece which hampered Euro progress.
The Euro-zone flash PMI releases registered mixed readings with a similar pattern across France and Germany. The manufacturing data was weaker than expected with an overall Euro-zone reading of 51.1 compared with an expected 51.8, but the services-sector data was stronger than expected and prevented further damage to the Euro.
The latest CFTC positioning data recorded a sharp decline in long dollar positions to a seven-month low. The data was captured last Tuesday before the surprise Federal Reserve decision and there is likely to have been a further sharp drop in long dollar positions since then which will create reservations over selling the currency aggressively.
The US PMI manufacturing data was slightly weaker than expected with the main focus again on Fed speakers. Following hawkish comments from regional president George’s on Friday, there was a more moderate tone on Monday from the generally dovish Dudley. He stated that recent labour-market improvements were likely to have been over-stated and that it could take some time for the 6.5% unemployment threshold to be reached. The comments overall did not provide significant net dollar support.
ECB President Draghi maintained his recent stance on the economy with optimism that growth would continue in the third quarter despite weak industrial output data for July. He also remained confident that inflation would stay very low while stating that the ECB was ready to use another LTRO if needed.
EUR/USD remained in a corrective phase following sharp gains last week and dipped lower following a failure to break above 1.3550. The pair dipped below the 1.35 level following Draghi’s comments as players tested the strength of support levels. USD/CHF was unable to gain any traction above 0.9125 and was weighed down by selling pressure on the crosses. GBP/USD tested resistance above the 1.6050 level before drifting lower in line with a weaker Euro. The yen was resilient as USD/JPY tested support below 99.0.