Breakthrough in Talks for New ‘Grand Coalition’ Prompts Spike in EUR/USD
The Euro US Dollar (EUR/USD) exchange rate struck a three-year high this morning following the news that coalition talks in Germany have finally made some progress.
EUR/USD rocketed up 0.73% this morning, with the pairing having advanced by almost a cent at the start of the European session and extending Thursday’s rally.
Hopes of Possible Coalition Deal in Germany Bolsters Euro (EUR)
The Euro is building on the gains made on Thursday this morning after German Media reported that a breakthrough had been made in talks between Angela Merkel’s conservative bloc and the Social Democrats (SPD).
The breakthrough in preliminary negotiations will hopefully lead to the start of official coalition talks in the coming week.
Investors are hopeful that this will bring an end to the political deadlock in Germany that has hung over the Eurozone’s largest economy since inconclusive elections in September.
The SPD was previously part of a ruling coalition with Merkel’s conservative block, but decided to end the alliance following unprecedented losses in September’s election.
This lead to Merkel attempting to form a so-called ‘Jamaica’ coalition with the Liberal Free Democrats and the Greens, but after talks failed the SPD stepped back up the negotiating table in order to help break the deadlock in the country and avoid a second round of elections.
US Dollar (USD) Weakened by Poor PPI Figures
Meanwhile the US Dollar remains subdued this morning in the wake of Thursday’s disappointing Producer Price Index (PPI).
The index saw price growth contract from 0.4% to -0.1% in December, a much worse outcome that the more modest slip to 0.2% that had been forecast by economists.
It was also the first monthly decline in producer prices since August 2016 and appeared to be driven lower by a drop in demand for services and lower prices of trade.
EUR/USD Forecast: USD to be weakened by US Inflation Figures?
Looking ahead the EUR/USD exchange rate may continue to punch higher this afternoon as the US publishes its latest inflation figures.
Economists forecast that US inflation will have retreated from 2.2% to 2.1% last month.
This may lead to some doubts over whether the Federal Reserve will remain committed to raising interest rates up to three times in 2018.
Some Fed policymakers have already expressed their doubts over whether more than two hikes this year may be too much as they remain concerned over the stubbornly low inflation rate.
Also possibly damaging the US Dollar will be the release of the US retail sales figures for December, with analysts predicting that sales growth will have slid from 0.8% to 0.4%.
Meanwhile EUR investors will now turn their attention to next week, with the Euro likely to appreciate on Monday if the Eurozone’s trade balance surges as forecast.