Euro at Risk From Sunday’s German Coalition Vote

Euro Talking Points:

- The possibility of a US government shutdown and next week’s ECB meeting are likely to determine the direction of EURUSD short-term.

- However, a key vote in Germany Sunday could also be important for the Euro at the start of next week’s trading.

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German coalition talks and the Euro

This coming Sunday, Germany’s center-left Social Democratic Party will decide whether to join Chancellor Angela Merkel’s conservatives in a coalition to govern Europe’s largest economy. While that is likely to be a less important driver of EURUSD in the days ahead than the possibility of a US government shutdown or next week’s European Central Bank meeting, it will likely affect the pair even so.

The SPD is wary of joining Merkel’s Christian Democratic Union/Christian Social Union to form a new government and if it decides not to she will have few options. She could form a minority government relying on the support of opposition parties or call a new election – neither of which would likely be seen as good news for the Euro. Moreover, an SPD decision not to link up with the CDU/CSU would likely usher in a lengthy period of political uncertainty in Germany and could even result in Merkel’s replacement as the conservatives’ leader.

So far, Germany’s political problems have had little impact on the Euro, which has benefited from US Dollar weakness and, in the last few days, from the concerns about a possible US government shutdown. However, that could change if traders decide to factor political risk into the exchange rate.

EURUSD Price Chart One-Hour Timeframe (December 19, 2017 to January 19, 2018)

Chart by IG

ECB meeting in focus

This will all pose a problem for the rate-setters on the ECB’s Governing Council, who meet this coming Thursday. They are unlikely to change the ECB’s current market guidance on monetary policy just yet, perhaps not until March, but ECB President Mario Draghi could still drop a hint next week that the ECB’s pledge to keep buying bonds to boost the Euro-Zone may be dropped relatively soon.

That would imply that tighter monetary policy is on the way, and help support the Euro. It would be unwise to ignore Germany’s political problems nonetheless.

--- 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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