Euro Wilts As Marathon German Coalition Talks Collapse

Talking Points:

• The Euro is struggling in early trade
• Germany has been without a Federal government since elections on September 24
• Coalition talks have been lengthy, but seem to have broken down

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The Euro fell sharply as Asian trade got under way Monday on news that exploratory talks to form Germany’s next coalition government appeared to have collapsed.

The pro-business Free Democratic Party walked out on Sunday night after the four parties involved missed several self-imposed deadlines to resolve differences on migration and energy policy.

Chancellor Angela Merkel has been trying to put together a coalition between her Christian Democratic Union, its Bavarian equivalent the Christian Social Union, the FDP and the Green Party following Federal elections on September 24. Migration into Germany has emerged as the most contentious issue following the country’s refugee crisis, but there are other clear areas of difference between so disparate a grouping.

A political vacuum in the European Union’s powerhouse would never be a welcome sight for global investors. At this point however, with UK’s exit from the bloc under torturous negotiation many Eastern states opposed to further migrant admission, it seems especially poorly timed. One modest consolation may be that the EU’s economy seems more robust than it has for years, but even that happy state may not survive a loss of German confidence.

At any rate the Euro started a new trading week under considerable pressure. Continued political deadlock will probably mean another vote but, given Germany’s patchwork of political parties and western elections’ tendency to close results, resolution and stable government may remain elusive.

On its daily chart EUR/USD remain in a broad and gradual downtrend from the peaks of 2017. The EU’s comparative economic vigour has seen the pair make strong gains from January’s lows, but the toll now being exacted by German political gridlock is clear.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX