GBP/EUR Stuck Below Opening Levels as Merkel Makes Coalition Breakthrough

January 12, 2018 - Written by Toni Johnson

STORY LINK GBP/EUR Stuck Below Opening Levels as Merkel Makes Coalition Breakthrough

The Pound Sterling to Euro exchange rate is stuck below opening levels today as the EUR receives a boost from news that Angela Merkel may be closer to forming another coalition government.

Additionally, market demand for USD has been cooled by the approach of key inflation and retail data, allowing the Euro to rise and therefore pressuring the GBP/EUR exchange rate lower to 1.1228.

The Pound has been unable to break into positive territory, despite hopes of more control over the outcome of Brexit after Nigel Farage suggested yesterday that holding another referendum may be necessary.

GBP Trends Flatly despite Building Hope of Second Brexit Referendum on Farage Comments

The Pound is stuck around opening levels versus the Euro, despite bullish advances elsewhere, as the common currency benefits more from weakness in the US Dollar.

A lack of scheduled UK data today is further keeping the Pound at a disadvantage versus the Euro, which is also enjoying tailwinds from the recent hawkish European Central Bank (ECB) meeting minutes and solid German GDP figures.

Sterling has, however, found some support from rising hope that there will be some meaningful vote on the final Brexit deal negotiated by the government before the UK goes ahead and enacts it split from the European Union.

This hope comes after the possibility of a second Brexit referendum was floated by a most unlikely source: former UK Independence Party (UKIP) leader Nigel Farage himself.

Variety claimed that another referendum was needed to resolve the issue once and for all, which has been viewed as an acknowledgement that there is building political pressure for the UK to have more say in the final Brexit arrangement than what the government is currently willing to allow.

EUR Rises as Angela Merkel Makes Breakthrough in Coalition Talks

German Chancellor Angela Merkel has made a key breakthrough in negotiations to form a third ‘grand coalition’ with former political partner Martin Schultz.

Germany has been left without a government for several weeks after the latest elections saw Merkel’s majority wane and initial coalition talks with other minor parties failed to yield an agreement.

Merkel lost -65 seats in the Bundestag during the September elections, while the SPD lost -40 seats - the far-right Alternative for Germany (AfD) entered parliament for the first time, seizing 94 seats from the more established parties.

Schultz’s Social Democratic Party (SPD) had previously ruled out forming another alliance with Angela Merkel and her Christian Democratic Union (CDU), but after overnight talks lasting more than 24 hours, the two parties have finally agreed a 28 page blueprint for negotiations.

Meanwhile, market anticipation of today’s high-impact US economic data this afternoon has further created demand for the Euro, with investors staying away from its inversely-correlated partner the US Dollar.

Yesterday’s release of the minutes from the December European Central Bank (ECB) monetary policy meeting also continues to provide upside pressure for the Euro, after revealing that policymakers believe their guidance on interest rates will need to change soon.

US Data Forecast to Boost Pound if Inflation Figure Prints Strongly

There is no UK or Eurozone data on the calendar for the rest of the session, but the afternoon’s US releases could cause turbulence for the Pound Sterling to Euro exchange rate.

Inflation data for December is expected to show a minor year-on-year slowdown in overall price growth to 2.1%, but core inflation is expected to hold steady at 1.7% annually and accelerate from 0.1% to 0.2% month-on-month.

This could help to soften fears that the US economy is suffering from systematically-low inflation, rather than a temporary weakness.

This would boost the US Dollar to the detriment of the Euro, allowing Pound Sterling to rise above opening levels.

Advance retail sales and wage growth data, also for December, could give the US Dollar more reasons to advance, or undermine the positive impact of inflation data if the CPI figures print in line with, or better than, forecasts.

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TAGS: Pound Euro Forecasts