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Possible Merkel Departure Weighs Heavily on Euro US Dollar Exchange Rate

As German coalition talks broke down over the weekend the Euro came under renewed pressure, with long-standing Chancellor Angela Merkel’s future looking decidedly less clear.

This naturally left the Euro US Dollar exchange rate on a sharp downtrend, undermining the recent bullishness of the single currency and its optimistic economic data.

Carsten Brzeski, Chief Economist at ING, noted:

‘Contrary to Angela Merkel’s experience with European summits in Brussels, where long meetings eventually end with a compromise, yesterday’s meeting did not. The liberal FDP walked away from the talks, with FDP leader Christian Lindner saying that “it’s better not to govern, than to govern badly”. He added that party leaders had failed to build “a foundation of trust”. This probably is the best summary of why the talks for a so-called Jamaica coalition failed: next to political differences, personal and atmospheric tensions had overshadowed the talks from the beginning onwards.’

The failure to agree a new coalition creates the possibility of a fresh general election, something which could see Germany remain in a state of political limbo well into next year.

Even so, the initial shock of the news soon started to fade, offering the Euro some degree of support.

If Thursday’s raft of Eurozone manufacturing and services PMIs prove positive this could see the EUR USD exchange rate recovering much of its lost ground, with the currency union still on track to post robust growth for 2017.

Strong US Economy Keeps USD Exchange Rates on Bullish Footing

Demand for the US Dollar remained solid, meanwhile, thanks to an unexpectedly strong rebound in October’s leading index.

As the measure leapt 1.2% on the month, more than reversing September’s -0.2% contraction, this encouraged investors to pile into the ‘Greenback’.

Signs continue to highlight resilience within the world’s largest economy, keeping the Federal Reserve on track to raise interest rates once again in December.

However, forecasts point towards a loss of momentum in the latest existing home sales data, which could diminish the relative strength of USD exchange rates.

While any weakness here is unlikely to be enough to alter the policy outlook of the Fed in the short term this may still be enough to knock the US Dollar off its bullish run.

US political developments will also remain in focus this week, with markets still watching the progress of the Trump administration’s much-anticipated tax reform bill.

Current EUR USD Interbank Exchange Rates

At the time of writing, the Euro US Dollar exchange rate was slumped in the region of 1.1752. Meanwhile, the US Dollar Euro exchange rate was making solid gains around 0.8508.