Sun, May 22, 2022 @ 23:59 GMT
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Euro and Pound Underperform on Heightened Political Worries

Just a week after an indecisive general election outcome in Germany threatened to derail the euro rally, a separatist vote in Spain’s Catalonia region on Sunday has further dampened sentiment for the single currency at the start of trading in the fourth quarter. The pound has also started the new quarter on a weak note as uncertainty about the UK’s Brexit strategy and doubts about Theresa May’s fragile government have pulled sterling below the key $1.33 level.

An attempt by the Spanish government to disrupt and prevent an independence referendum in the Spanish region of Catalonia by sending in riot police has failed to quell the situation. The regional government said almost 90% of the 2.26 million people who voted yesterday backed independence. Catalonia’s president, Carles Puigdemont, said he will send the results, once finalized, to the Catalan parliament, which will then have 48 hours to declare independence from Madrid.

However, Spain’s Justice Minister, Rafael Catala, said today the Spanish government will do "everything within the law" to prevent the secession of the region, while the European Commission has described it as "an internal matter for Spain" given that the referendum was illegal under Spanish Law. Apart from the vote being unconstitutional, a low turnout of just over 42% also casts doubt about its legality, not to mention that about 770,000 votes were lost due to ballot boxes being seized by the police.

The euro headed back towards last week’s more than one month-low of $1.1715 in European trading today, as the latest political troubles added to the uncertainty emerging from the German election result. German Chancellor Angela Merkel’s CDU/CSU party gained a fewer share of the vote on September 24’s general election, forcing her into possibly prolonged coalition talks with two smaller parties.

However, despite the negative developments, reaction in financial markets has been fairly contained as few believe the referendum will lead to Catalonia’s independence from Spain. The vote is unlikely to be recognized by the Spanish government, which has threatened to suspend autonomy to the regional parliament if local politicians press ahead with declaring independence.

In Britain, politics also looks set to dominate the week’s headlines as the ruling Conservative party hold their annual conference. The UK finance minister, Philip Hammond, today admitted publicly that there were "differences of view" within the cabinet regarding what type of relationship Britain should have with the European Union post-Brexit. He was critical of the foreign minister, Boris Johnson, who in recent days has been breaking ranks with the government’s official position on Brexit.

Johnson’s actions have fuelled speculation he may challenge the Prime Minister, Theresa May, for party leadership, which could risk a fresh snap general election given the Conservatives’ lack of majority in parliament. Adding to the political headaches for May, is the growing criticism by British businesses of the government’s handling of Brexit, particularly about the lack of clarity and slow progress in the negotiations. Businesses are demanding a long transition period of possibly up to three years once the UK leaves the EU so as to smoothen the exit process and to lessen some of the uncertainty.

The pound slid to a 2½-week low of $1.3255 on Monday, losing almost 3% of its value from the 15-month high of $1.3645 set on September 20.

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