Watch Out for Euro Strength as a German Coalition Deal Nears Agreement

Talking Points:

- By next week it should be clearer whether German Chancellor Angela Merkel will be able to form a new “grand coalition” to keep her in power.

- If she does, as seems possible, the Euro should benefit, particularly as the US Dollar and the British Pound could weaken.

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It is now almost three months since Federal elections in Germany resulted in a stalemate but a coalition deal is edging closer and if Chancellor Angela Merkel succeeds in putting one together the Euro should benefit – particularly as the US Dollar is currently range-bound and the British Pound is out of favor.

In the election, Merkel’s conservatives – comprising the Christian Democratic Union (CDU) and its sister party the Christian Social Union (CSU) – saw their vote drop by more than 8% to 33% while the main opposition, the Social Democratic Party (SPD) led by Martin Schulz, won just 20%.

Merkel has already tried, and failed, to reach a deal with two smaller parties: the Greens and the liberal Free Democratic Party (FDP). So now she is trying to renew the so-called “grand coalition” with the SPD and the signs are looking hopeful. The SPD will hold a party congress in Berlin this week, where its members are expected to approve talks between Merkel and Schulz. That does not mean an SPD agreement to support a Merkel government but it would be a hopeful sign that should benefit the Euro.

Unfortunately for Merkel, there is at least one major problem. Merkel’s CSU ally Horst Seehofer has decided to step aside as premier of Bavaria to make way for his right-wing rival Markus Söder. That is likely to widen the gap with the SPD over the thorny issue of the rights of migrants to bring their relatives to Germany – which the SPD approves of but the CSU will likely oppose.

That said, a Euro-boosting deal is now tantalisingly close, giving the currency an edge over the Pound, which is under pressure from the failure so far of the Brexit negotiations between the EU and the UK. It should also lift the Euro against the US Dollar if attempts to reconcile the tax-cut bills in the House and Senate fail to make progress.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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