Euro at Risk From German Political Stalemate

Talking Points:

- Germany’s political leaders are about to try again to form a new coalition government.

- So far, the Euro has shrugged off the stalemate but it will likely suffer if there is no breakthrough soon.

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So far, the Euro has held up well despite the continuing failure of Germany’s political leadership to form a new coalition government. However, if the stalemate continues for much longer it will likely come under downward pressure.

At the time of writing, a Google news search for “German coalition talks” makes depressing reading. The top few headlines include:

5 ways Germany’s coalition talks could come unstuck,

German parties at odds ahead of coalition talks,

Merkel resumes talks with SPD in hope of ending political stalemate,

Why the once-durable Merkel may not last much longer, and

Berlin political deadlock stymies Macron’s Eurozone plans.

Euro still in demand

With Euro traders concentrating on a weak US Dollar and the prospect of Euro-Zone monetary stimulus being reduced or even ended this year, the currency is still in demand and will likely strengthen further. But persistent political instability in the Euro-Zone’s largest economy could potentially undermine sentiment longer-term.

EUR/USD Price Chart Daily Timeframe (January 2, 2017 to January 4, 2018)

Chart by IG

Worst outcome for the Euro

Perhaps the worst outcome for the Euro would be if the negotiations fail and a new Federal election is called. One columnist noted: “It is no longer absurd to suggest [UK Prime Minister] Theresa May could outlast [German Chancellor Angela] Merkel.”

However, Merkel is seen as the consummate dealmaker so the odds remain good that she will succeed in forming a new coalition and holding on the Chancellorship; an outcome that would likely be seen as positive for both the Euro and German stock prices.

--- 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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