German Coalition Talks Hit Roadblock, Triggering EUR USD Drop

November 20, 2017 - Written by Ben Hughes

STORY LINK German Coalition Talks Hit Roadblock, Triggering EUR USD Drop

Over the previous week, the Euro saw an overall rise against the US Dollar.

The EUR/USD exchange rate opened trading on Monday in the region of 1.1647, later closing higher at a rate of 1.1792 late on Friday.

Compared to last week, the Euro has only seen a minor dip against the US Dollar by trading at a rate of 1.1786.

Euro US Dollar Rate Slides after German Coalition Process Collapses

Germany has been firmly in the spotlight today, as the main cause of Euro to US Dollar losses.

In a shock development, German coalition talks to form the next government are back to square one.

After the September 2017 elections, Angela Merkel’s CDU/CSU alliance secured the most seats, but not enough to form a majority.

The CDU/CSU pairing had been courting the Green Party and FDP Party, in an effort to form a ‘Jamaica’ coalition.

While talks had been progressing steadily since the election, today has seen the FDP announce that it is withdrawing from talks.

Explaining the circumstances, FDP leader Christian Lindner said;

‘[We have failed to secure] a basis for trust and a shared idea. It is better not to govern than to govern badly’.

Merkel herself has also responded to this alarming development, stating;

‘We tried everything to find a solution. We think we were on a path where we could have reached an agreement’.

The third voice on the matter has come from Cem Ozdemir, Green Party Co-leader. Reflecting on how damaging this news is, Ozdemir said;

‘The only possible democratic constellation [for a government] was unfortunately scuppered by the FDP’.

Analysts have been quick to offer forecasts on the situation, with two major options being presented.

On the one hand, Merkel could salvage a working leadership by forming a minority government with the Greens and obtaining support agreements from other parties.

This is considered a high-risk move, as it would leave the government vulnerable to challenges from opposition parties like the SPD.

The alternative is to call for a snap election, which is also seen as a political gamble.

Historically popular parties like CDU/CSU and the SPD both suffered heavy losses in September’s election, so a fresh vote could further reduce their share of government seats.

Angela Merkel has recently met with German President Frank-Walter Steinmeier to discuss her possible options for proceeding. After the conversation, Steinmeier issued the following statement;

‘All political parties elected to the German parliament have an obligation to the common interest to serve our country.

I expect from all readiness to agree [on] a government in the near future’.

This remains an ongoing situation for the German government, so further developments could cause more Euro losses over the week.

US Dollar Euro Rate Rises on Tax Speculation

The US Dollar has made a minor advance against the Euro today, trading higher because of taxation-related news.

The US Senate is currently examining plans to implement tax cuts across the population, which would be paid for by greatly expanding the current federal deficit.

There have been voiced concerns that the deficit could grow by 6.9tn by 2040, but analysts are also optimistic that it could trigger a US economic revival.

The greater issue is whether the reforms will actually be passed in the first place, given that the Republican Party has a smaller majority within the Senate.

In the event that the tax reforms actually get passed, this would represent genuine progress for the Republicans.

The party has previously suffered a high-profile loss earlier in the year, when it failed to definitively repeal and replace the Affordable Care Act (ACA) of the previous administration.

Euro USD Losses possible on Upcoming Confidence Flash

Apart from further German news, the Euro could also be influenced by a Eurozone-wide consumer confidence reading this week.

The consumer confidence flash for November will be out on Wednesday and is forecast to show no change to a negative reading.

While this is only an estimate for the final reading, it would still set a poor precedent for the final figure.

The headline US news on Tuesday will be a speech from Federal Reserve Chair Janet Yellen.

Yellen will be stepping down as Chair in 2018, but she could still influence the US Dollar if she discusses a possible interest rate hike in December.

This is widely seen as a likely outcome, but such an event is still not set in stone. Any final hints at a December rate hike could trigger a clear EUR USD advance.

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TAGS: Euro Forecasts