Political risk in Washington has risen alarmingly now that President Trump’s personal attorney Michael Cohen has pleaded guilty to multiple charges of tax evasion, money laundering and paying hush money to adult film actresses that violates Federal campaign finance laws. Cohen faces 65 years in jail and Trump is now, in American legalese, an unindicted co-conspirator to a Federal crime. This means the risk of impeachment has soared, a scenario that could end the political career of the forty fifth US President. This is the reason the US Dollar Index has fallen to 95 as I write even though the Chicago Fed Funds futures rate discounts a 94% probability of another interest rate hike at the September FOMC and 65% odds at the December FOMC. Political risk has eclipsed interest rate spreads as the catalyst of long King Dollar liquidation last week. This is the reason the Euro has risen for a sixth successive session and flirts at 1.16 as I write, its best performance in two years.
There is a fundamental catalyst for the Euro rally last week other than the legal noose tightening around the Trump White House. Eurozone collective wage growth data rose 2.2% in 2018, the highest since 2012. The policy implications of this data for Dottore Mario Draghi and at the next ECB monetary conclave are obvious. Tighter labor markets in Europe are finally leading to a boost in the pace of wage growth. This means a rise in Eurozone inflation risk, the Weimar era nightmare for the Reichsbank/Bundesbank tight money zealots who ultimately determine ECB interest rate policy in Frankfurt. This could be a Mamma Mia inflation moment for Draghi and signal a more sustainable bull run for the Euro than priced into risk reversals in the foreign exchange options market.