EUR Talking Points:

- EURUSD climbed for a second successive day Thursday as ECB minutes suggested its Euro-Zone stimulus program may be tapered earlier than previously expected.

- However, traders in the pair should prepare for a possible setback if talks on forming a new German coalition government fail.

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EURUSD strength may be temporary

EURUSD strengthened for the second successive day Thursday, boosted by a hawkish set of minutes of the last meeting of the European Central Bank’s Governing Council. The markets interpreted the minutes as meaning that the ECB could start reducing its monetary stimulus program earlier than previously expected.

In response, the Euro rose, adding to its gains Wednesday on a report – later dismissed – that China may reduce or halt altogether its buying of US Treasury notes and bonds. That weakened the US Dollar on a flight to haven currencies despite the support a rise in Treasury yields would normally provide.

EUR/USD Price Chart Five-Minute Timeframe (January 10-11, 2018)

As EURUSD Rises, Keep an Eye on German Coalition Talks

Chart by IG

EUR to suffer if talks fail

China’s denial of a policy change towards US Treasuries strengthened USD temporarily but EURUSD could weaken much further if talks between Germany’s two main political groupings fail. Chancellor Angela Merkel’s conservative CDU/CSU group is currently in talks with the center-left SPD about forming a new “grand coalition” government, and the negotiations are certain to be difficult.

She is seen as a consummate dealmaker so the chances are that she will succeed. However, failure would mean a loss of authority, the possibility of a minority government or even new elections. All would be seen as bad news for the Euro-Zone, and therefore negative for the EURUSD pair.

--- 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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