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Euro Pound Exchange Rate Advances on German ‘Grand Coalition’ Hopes

  • Euro Pound Exchange Rate Climbs to 0.89 – Pair recovers recent losses
  • Could Germany See Another ‘Grand Coalition’? Merkel’s CDU in talks with SPD
  • EUR Forecast: German Politics Could Boost Euro – Upcoming German data could too
  • GBP Forecast: Brexit Talks in Focus – Could Brexit negotiations progress in December?

The Euro Pound exchange rate has seen stronger performance in recent sessions and has recovered much of its recent drops, due largely to a strong Eurozone economic outlook and hopes that German coalition talks will still succeed rather than falling through completely and leading to a new election.

EUR GBP began last week at the level of 0.8922 and tumbled to the level of 0.8846 on Tuesday. The Euro’s recovery then built steam and on Friday the pair advanced, closing the week at around 0.8946. The pair continued to trend near this level on Monday morning.

Euro (EUR) Supported by German Coalition Hopes

Last Monday, the Euro slumped against most major currencies as it emerged that German coalition talks between Chancellor Angela Merkel’s CDU and the business friendly FDP Party had collapsed.

Merkel had been attempting to form a coalition government with the FDP and the Greens Party.

The failure of talks briefly caused markets to panic that Merkel would lose power, either through another snap election or the possibility of a minority government.

As Germany is the Eurozone’s biggest economy and one of the most fundamental nations in the bloc, analysts became concerned that this could have a negative impact on the Eurozone as a whole.

However, as investors remained optimistic about Germany’s economic outlook and the Eurozone’s overall economic outlook, the Euro’s losses were limited and it was supported by strong ecostats in the second half of the week.

The Eurozone’s November consumer confidence projection came in with its first positive since 2001. This was followed on Thursday by Markit’s November PMI projections, which largely beat even optimistic analyst forecasts.

With the bloc’s economic outlook strong, investors were further encouraged when markets opened this week due to news that Merkel’s CDU party would instead seek out another ‘grand coalition’ with the centre-left SPD Party.

The previous German government was a CDU/SPD grand coalition too, but SPD initially indicated it was not interested in another coalition. Many officials have since hinted that a grand coalition would be a preferable outcome to another election or a minority government.

According to Horst Seehofer, head of the Bavarian CSU Party which works alongside Merkel’s CDU Party;

‘An alliance of the conservatives and SPD is the best option for Germany – better anyway than a coalition with the Free Democrats and Greens, new elections or a minority government,’

Pound (GBP) Investors Await Brexit Developments

Britain’s recent underwhelming ecostats have kept the Pound under pressure, with most of the Pound’s recent support coming from market hopes that the Brexit process will see significant progress over the coming month.

The UK government recently indicated that it was willing to pay a lot more towards the UK-EU ‘divorce bill’.

The divorce bill has long been a major part of the ‘deadlock’ in negotiations and investors are hoping this concession will lead to meaningful progress in talks.

Brexit negotiations are expected to resume in the coming weeks and any signs that the first phase of talks is heading to a conclusion would make investors much more confident that UK-EU trade talks could begin within the coming months.

As a result, Brexit developments are among the most anticipated factors of Pound trade at the moment.

Brexit has only taken more focus following comments made by Bank of England (BoE) policymaker Silvana Tenreyro on Friday.

Tenreyro stated that while the current market expectation of three BoE interest rate hikes over the next three years is reasonable, further interest rate decisions will heavily depend on how the Brexit process unfolds.

Euro Pound Exchange Rate Forecast: German Grand Coalition Could Boost Euro

The Euro Pound exchange rate could be driven by political news over the coming days, particularly any developments in German coalition talks or the Brexit process.

If it appears more likely that German Chancellor Angela Merkel will succeed in forming a coalition, the Euro could sturdy. Many investors see a CDU/SPD ‘grand coalition’ as among the most preferable outcomes so this would certainly give the shared currency an added boost.

However, it’s still possible that coalition talks could fall through again and make a minority government or even a snap election more likely. In these scenarios, the Euro Pound exchange rate would likely drop.

Euro demand could also be influenced by notable Eurozone ecostats due in the coming days.

Key German data, including inflation, retail sales and unemployment will be published on Wednesday and Thursday. Eurozone inflation and unemployment data will also be published on Thursday and could influence the Eurozone economic outlook.

Sterling is unlikely to be heavily influenced by UK data for most of the week, though consumer confidence data on Thursday and manufacturing PMI on Friday could inspire some movement.

EUR GBP Interbank Rate

At the time of writing this article, the Euro Pound exchange rate trended in the region of 0.8940. The Pound Euro exchange rate traded at around 1.1185.