Euro Set to Benefit if German Coalition Government is Agreed

Talking Points:

- After months with only a caretaker government, Germany’s politicians are inching towards a coalition agreement.

- That should be positive for the Euro amidst the turmoil elsewhere in the markets.

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Germany’s politicians appeared to be inching towards a deal to form a new coalition government Tuesday; potentially a positive development for the Euro amidst the turmoil elsewhere in the financial markets.

The country has been without a stable government since indecisive Federal elections last September, following which Chancellor Angela Merkel has been struggling to reach a deal with one or more opposition parties.

Euro weaker amid market turmoil

Now, her conservative Christian Democratic Union/Christian Social Union (CDU/CSU) bloc seems close to reaching a deal with the opposition Social Democratic Party (SPD) to renew their so-called Grand Coalition and keep her in power as Germany’s leader.

While attention in the markets is currently elsewhere, such a development would provide some stability in the European Union and potentially benefit the Euro, which has fallen back against the US Dollar as global stocks have sold off.

EUR/USD Price Chart, Daily Timeframe (August 28, 2017 – February 6, 2018)

Chart by IG

Merkel is seen as a safe pair of hands and the markets would likely welcome an agreement that would keep her as Chancellor and the de facto EU leader. In more normal times, the DAX index of German stocks would probably benefit too but currently it is largely following the lead of Wall Street and has plunged in recent days.

DAX Price Chart, Daily Timeframe (August 28, 2017 – February 6, 2018)

Chart by IG

A coalition deal would also potentially benefit German government bonds, known as Bunds, which have moved ahead strongly as a perceived haven investment in times of market turmoil. This session, the yield on the 10-year Bund, which moves in the opposite direction to the price, was down almost five basis points at 0.694%.

--- 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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