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Pound Euro (GBP/EUR) Exchange Rate Slides as Germany Clinches Deal on Grand Coalition

Merkel and Schulz Clinch Agreement on Grand Coalition Deal, Pound Euro (GBP/EUR) Exchange Rate Slides

The Pound Euro (GBP/EUR) exchange rate fell on Wednesday as markets responded to ongoing Brexit related uncertainty and fresh news that Germany’s Conservatives (CDU) and the Social Democrats (SPD) have successfully clinched a deal on a new grand coalition.

Germany has been without an effective government for over four months after the inconclusive elections in September, leaving many investors concerned that Germany might face a return to the polls if no deal was reached.

Progress has, nonetheless, been made on this front, with negotiators in Merkel’s CDU and Martin Schulz’s SPD having reached agreement.

‘I think it’s about time we had the prospect of a government in Germany. So it’s a good day,’ said CSU Politician Alexander Dobrindt on Wednesday.

This news is bittersweet, however, with the SPD set to control six ministries including Finance and the Ministry of Foreign Affairs.

Such a significant power shift could prompt changes to Germany’s economic footing, especially if Germany’s next finance minister has a less hard-line stance on Eurobonds and debt relief than Wolfgang Schäuble.

Nonetheless, the SPD still has to vote on proceedings before anything is final.

Leaked EU Brexit Document Prompts Market Concern, GBP Exchange Rates Slide

Lacking much in the form of notable UK ecostats on Wednesday investors have instead turned their attention to the ongoing Brexit negotiation process and tomorrow’s looming Bank of England (BoE) rate decision.

On the Brexit front, markets are currently assessing the leaked release of a draft section of the EU’s Brexit withdrawal agreement which reveals that Brussels is seeking the power to suspend ‘certain benefits’ for the UK if the European Court of Justice (ECJ) cannot solve disputes within the two-year transition timeframe.

This has been deemed threatening by some, as it could result in the EU having the ability to impose tariffs on goods, enforce customs checks, or ground flights by suspending aviation rights.

Nonetheless, the government has sought to downplay the significance of the document, simply insisting that it will form part of the negotiations.

The Pound has grown increasingly resilient to Brexit-related soundbites, but a lack of demonstrable progress this week could leave transitionary talks extending longer than originally anticipated, thus delaying trade talks in phase 3.

GBP/EUR Exchange Rate Forecast: BoE Rate Decision in Focus

The Pound Euro (GBP/EUR) exchange rate could encounter some volatility tomorrow as markets react to the first Bank of England (BoE) rate decision of 2018.

Whilst investors do not currently expect a rate hike at this meeting, hopes have steadily grown that the Monetary Policy Committee (MPC) will be increasingly optimistic in their assessment of the UK’s economic future, perhaps even to the point of suggesting a rate hike in May.

This outlook is consistent with the analysis by the Financial Services Company RBS, who also claimed that a May rate increased could be warranted amid upbeat UK growth, but that it would be dependent on progress made in Brexit transitionary talks.

This could materialise in a hawkish shift in the accompanying statement tomorrow, or indeed hawkish remarks from Governor Mark Carney in the press conference.

If the bank does point to a rate hike in May then the GBP/EUR exchange rate could rally once more.

If the MPC moves cautiously, however – perhaps referencing the disappointing trifecta of recent private sector data – then the GBP/EUR exchange rate could extend its fall.