European trouble spots will continue to buoy the US dollar

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Over the past few weeks, the US dollar rallied and EURUSD recently fluctuated around the 1.15 level. Thus, apart from a brief time period in August, the euro traded at noticeably lower levels than in previous months. We attribute the weaker euro to the escalation of political upheaval in Europe. The Brexit negotiations could not be concluded as planned in midOctober. There was not even enough progress made to be able to set a new deadline for the next meeting in the form of a special summit in November. This has increased the risk of a hard exit further, which would at least in the transition phase harbor a number of risks. The most obvious – but far from the only one – concerns customs clearance between the UK and the EU, which would involve both direct costs (customs duties) and indirect costs (longer delivery times). The next regular summit of EU heads of state and governments will take place in mid-December. However, even if an agreement is reached, the resulting package will still have to be voted on by the British House of Commons. The vote on this package would probably take place in January and only then would the risk of a hard Brexit be potentially averted. The second major unfinished task in Europe is the conflict between the Italian Government and the European Commission. Italy has already been asked to submit a new draft budget by 13 November. In our opinion it is unlikely that Italy will already deliver an EU-compliant draft budget to Brussels by then; on the contrary, the conflict seems likely to drag on into next year.