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Euro US Dollar (EUR USD) Touches Two-Month High on German Coalition Hopes

The Euro US Dollar (EUR USD) exchange rate briefly reached a new two-month high this morning as investor confidence was bolstered by political movement towards a new coalition in Germany.

Euro (EUR) Strengthened by German Coalition Talks

The Euro was strengthened this morning by reports that German Chancellor, Angela Merkel’s conservative party would be willing to enter talks with its former coalition partners the Social Democrats (SPD) in order to form a new ‘grand coalition’.

This comes after the SPD handed a lifeline to Merkel at the end of last week suggesting that it would be willing to re-enter a coalition with the CDU to help end the political deadlock that had been caused by the breakdown in talks between the CDU, the Free Democrats (FDP) and the Green’s earlier in the week.

The SPD appears to reverse its decision to go it alone after it was pressured to preserve stability and avoid Merkel from having to hold snap elections.

With leaders of the Bavaria’s conservatives announcing their support for talks with the SPD the path now appears open for the formation of a new ‘grand coalition’, something that will be a relief to many investors.

Horst Seehofer, head of Bavaria’s CSU, said

‘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.’

US Dollar (USD) Remains Subdued Despite Strong Home Sales Data

While the US Dollar was able to recoup some of its losses in afternoon trade on Monday thanks to a surprise uptick in US New Home Sales last month, the currency’s gains were undermined somewhat by speculation over the Federal Reserve’s monetary policy for the next year.

The Fed is currently expected to vote to raise interest rates for a third time this year in December, with CME’s FedWatch tool placing the odds at over 90%.

However more unclear is what the central banks plans for 2018 will be, with inflation remaining stubbornly low and a new Chair set to take the helm.

Michael Hewson at CMC Markets said;

‘While a December rate move remains a done deal in the eyes of the markets, it’s what comes after that which is becoming less clear… and it is this uncertainty about US rate policy in 2018 which continues to undermine the currency.’

EUR USD Forecast: German Consumer Confidence to Rise?

Looking ahead the EUR USD exchange rate may strengthen again on Tuesday with the release of Germany’s latest consumer confidence index, with economists forecasting that it will have risen from 10.7 to 10.8 in December.

France will also release its latest consumer confidence tomorrow, which may also help to strengthen the appeal of the Euro if it rises into positive territory again in November.

Meanwhile a number of speech by Federal Reserve policy makers could undermine the US Dollar on Tuesday, especially if they appear dovish in regards to further interest rate hikes in 2018.

Current Interbank Exchange Rates

At the time of writing the EUR USD exchange rate was trending around 1.1930 and the USD EUR exchange rate was trending around 0.8379.