German coalition talks falter, Sterling climbs on Brexit optimism

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21 November 2017


Angela Merkel was dealt a serious blow in her attempt to form a coalition government on Monday, with the German Chancellor facing one of her biggest challenges as the leader of Europe’s largest economy since beginning her tenure in 2005.

ews that German coalition talks had failed when FDP leader Christian Linder had walked out of negotiations in the early hours of Monday morning sent the Euro sharply lower by over half a percent during Asian trading. In a topsy-turvy day for the common currency, the Euro recovered all of its losses during London open before ending the UK session back around its near one week low.

Chancellor Merkel now faces a number of fairly unpalatable decisions following the failed coalition talks. She may choose to create a new coalition with the Social Democratic Party, form a minority government or even call a fresh election, the latter of which would present a massive uncertainty to the market.

European Central Bank members Draghi and Lautenschlaeger also both spoke yesterday. President Draghi reiterated much of his dovish rhetoric from recent appearances, saying that inflation dynamics had not yet shown convincing signs of an uptrend. He also claimed that labour market slack remained significant, although did acknowledge that economic expansion continued to be broad based. With his comments mostly reiterating recent dovish messages, the Euro fell off the back of his appearance.

Activity was limited in the US on Monday and the Dollar was driven mostly by events elsewhere, with the Dollar index ending modestly higher. Currency traders will now await Wednesday evening’s Federal Reserve meeting minutes. We expect a hawkish tilt from the FOMC that acknowledges the recent impressive economic news out of the US and firmly points to another interest rate hike at the December meeting.

Sterling rises to two-and-a-half week high on Brexit news

The Pound climbed to its highest level against the US Dollar in two-and-a-half weeks, back above the 1.32 level.

Currency trading was light in terms of economic announcements, with traders instead reacting positively to weekend news on progress being made in the Brexit negotiations. Reports suggested that the UK cabinet is now set to back Prime Minister Theresa May’s plans to increase its divorce sentiment offer to the EU. With the UK’s political landscape beginning to look more secure than that of Germany, we think risks to EUR/GBP appear tilted to the downside this week.

Thursday’s revised third quarter GDP numbers will be the main draw in terms of economic data in the UK this week. In the meantime, ongoing developments in the Brexit negotiations continue to be the main driver for Sterling.