Merkel Sends Euro Higher

The interruption of last week’s steady negative news stream from the US saw the dollar consolidate its recent losses.  German Chancellor Merkel’s comments ended this brief phase and sent the euro higher. Since the euro broke above $1.1100-$1.1130,we have been warning of potential toward the US election high of $1.13.  

Merkel’s comments were not new, and the Chancellor may be as surprised as anyone with the market’s response.  She said the euro was “too weak,” and blamed the ECB.Visiting a school in Berlin, Merkel’s comment was an answer to a question about German foreign policy. Merkel linked the low price of oil and weakness of the euro to the German trade surplus.  

The EU, the IMF, and the US have been pushing Germany to boost domestic investment to strengthen the eurozone economy and offset its external imbalance, the size of which also violates European agreements. Merkel also seemed sympathetic to greater German investment. She also recognized that boosting German domestic consumption could reduce bilateral surpluses, like with France,but Merkel noted: “I can’t force people to buy Renault instead of a VW.”

Germany will provide an update of its Q1 GDP estimate tomorrow. The initial estimate of 0.6%, the fastest in four quarters, will likely be reaffirmed. With this estimate, a detailed breakdown will be available.Private consumption is expected to have risen by 0.3%, the same as in Q4 16.The four, eight and 12 quarter average is 0.4%.   

One of the factors that may be holding back private consumption in Germany is the poor wage growth. By nearly all economists’ reckoning, there is not much slack in the labor market. Employment is the highest since reunification. Wage growth is miserly, rising 1.8% year-over-year in Q4 16 after a 3% increase in 2015. Part of the slowing was due to the base effect, and this should ease, so a rebound in measured wage growth would not be surprising. 

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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