Brexit Briefing: German Coalition Collapse Could Hamper EU/UK Talks

2017-11-20 10:30:00

Nick Cawley, Senior Strategist

Talking Points

- The collapse of German coalition talks over the weekend will divert Chancellor Merkel’s attention from Brexit discussions.

- The UK cabinet is set to discuss upping the EU/UK divorce bill to GBP40 billion in an effort to progress to the second round of talks.

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EUR/GBP opened the week in the red after German coalition talks unexpectedly collapsed over the weekend leaving Chancellor Angela Merkel with two options; either to rule as a minority government or to call a new general election. The increased political uncertainty in Germany going forward will also weigh on future EU/UK negotiations as Chancellor Merkel will need to concentrate on shoring up domestic support ahead of trying to use Germany’s economic influence to help push through a more trade friendly Brexit.

The German political upheaval comes at the same time as the UK government is set to discuss upping their divorce bill offer to around GBP40 billion in an effort to kick-start the stalling talks. Over the weekend, Chancellor Philip Hammond, speaking on the BBC, said that the UK is “on the brink of making some serious movement forward in our negotiations with the EU, and starting to unlock that logjam so that people can start to see clarity about the future.” UK PM Theresa May will meet with her Brexit council Monday to discuss the improved offer in an effort to move talks on to the second phase of talks including future trade agreements. PM May will meet EU Brexit chief Michel Barnier on Friday.

The weekend’s events weakened the European single currency, while Sterling got a slight uplift on hopes the Brexit negotiations may start to move forward. However GBP traders will be looking ahead to Wednesdays’ Autumn Budget Statement where Chancellor Hammond is under pressure to give the ailing UK economy a boost, while making sure that provisions are made in case of a ‘hard Brexit.’

A look at the charts shows EURGBP stuck in a sideways channel over the past two months as EU/UK talks ebb and flow. A continued German political stalemate, or a well-received offer from the UK government could see the 50% retracement of the April/August move at 0.88100 under pressure, especially if the pair close below the cluster of ema levels between 0.88000 and 0.89000.

Chart: EURGBPThree Hour Timeframe (February 15 – November 20, 2017)