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Euro Feels a Slight Chill  from Germany

Posted by Joseph Trevisani on Nov 20, 2017 1:14:17 PM

The euro surrendered some of its recent gains as coalition talks in Germany collapsed, the first time since the Second World War that a general election has not led to a new government.

Germany’s strong and improving economy, evidenced in last Tuesdays healthy 0.8 percent quarter to quarter to growth backed by reviving European prospects, are currently having more impact on the euro than Ms Merkel's political troubles. 

Following the German GDP report on November 14th the euro scored its largest one day gain versus the dollar in five months rising 1.1 percent.

The euro was trading at 1.1742 in the early New York afternoon (12:41 pm) having opened at 1.1789 and moved as high as 1.1805. On November 15th the united currency had  touched 1.1860, its best level against the dollar since October 13th. 

The GDP result was the latest in a string of positive statistics from the Euro zone's largest economy. Confidence levels among German businessman reached an all-time high in October and the unemployment rate is at a historic low. 

Chancellor Merkel’s Christian Democratic Union (CDU) had suffered its worst post-war returns in the September 24th election garnering just 33 percent of the vote, a drop of 8 percent from the 2013 election.  It was the CDU’s i lowest total since 1949.  Its coalition partner, the Social Democratic Party, received just 20 percent of the vote, its worst post-war result and withdrew from the governing coalition.

A  brand new party, Alternative for Germany, founded in 2013,  surged into a third place finish. Its 94 seats in the Bundestag trail the CDU's 246 and the SPD's 153.  

Ms Merkel had been in coalition talks with the fourth place party the pro-business Free Democratic Party (FDP) whose 10.7 percent gave them 80 seats in the legislature. The FDP leader, Christian Lindner left the coalition talks on Sunday. 

It is now the choice of German President Frank-Walter Steinmeier how to proceed.  The office of the German President is largely ceremonial but in  political situations as this it is his decision whether to call new elections. Late on Monday he asked all parties to continue to negotiate all possible coalitions, suggesting that the gestation of a new government could go on.

Ms Merkel's current administration will continue as a caretaker government with all ministers and officials maintaining their positons. 

German media is reporting that Chancellor Merkel has said her party is ready for a fresh election though that does not mean a new vote is imminent.  

President Steinmeier seemed to rule out immediate elections instead stressing each party' obligation to its voters to attempt a government. 

However the President is required by the German constitution to nominate a chancellor for approval by the Bundestag.  If a stable government cannot be found after three rounds of voting Steinmeier would have no option but to call a new election.

For the moment at least,  currency markets do not appear to fear that possibility. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: WWM Alpha Trader

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