Monex: German traffic light coalition may positively affect EUR/USD

Monex: German traffic light coalition may positively affect EUR/USD

Valuta Politiek
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This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe.

EUR

The euro held up steady in the G10 currency board this morning after the German Federal elections failed to produce a decisive front-runner. The overall vote count saw the SPD receive a marginally lower than expected share in the overall vote count, while the CDU/CSU has fared slightly better than what was projected in polls heading into the election on Sunday. The SPD took 25.7% of the federal votes vs 24.1% for Laschet’s CDU in the provisional tally. This led to SPD leader Olaf Scholz claiming a mandate to form a coalition agreement.

Given the SPD and CDU have governed together for 12 of the past 16 years and have vowed to end their collaboration, they will aim for a coalition with third and fourth-placed parties: the Greens and FD, which finished with 14.8% and 11.5% respectively. In the coming weeks, the evolution of German coalition talks will be pivotal for the direction of the euro as well as the eurozone’s growth outlook and in turn monetary policy going forward.

The most likely outcome, the traffic light coalition, is formed by the SPD, Greens and FDP, while a slightly less likely option is the Jamaican coalition involving the CDU/CSU, Greens and FDP. A traffic light coalition is likely to bode better for EUR/USD given the fiscally expansive nature of the policy mix. Amid the political gridlock in Germany, focus turns to the Sintra event which is packed with ECB speakers from Tuesday to Wednesday.

USD

The greenback pared back some of Friday’s gains as concerns around China’s Evergrande moderated, leading to a more constructive risk tone in the Asia-Pac session. JPY was an exception to this, as the currency strengthened following local news flows which continue to fixate on the upcoming LDP Party election and optimistic Covid reports.

All eyes will be on Congress in the coming days, after Speaker of the US House of Representatives Nancy Pelosi stated on Sunday the Democrats will pass a $550bn infrastructure bill this week. She also told ABC she is ready to reduce the $3.5trn price tag on the larger spending plan known as the Build Back Better Act.

Beyond this, the Senate will vote on a stopgap funding bill with a debt ceiling suspension, although it is likely the GOP will block the consideration. While it will be an intense legislative week for the US, the dollar may also take cues from uncertainties around the German elections if this filters through to general risk sentiment.

GBP

GBP/USD is sticking to a narrow trading band this morning despite developments in the UK around the energy crisis. The UK government took emergency measures late Sunday after days of panic buying resulted in gasoline retailers having to shut their doors to customers as they ran out of fuel. The government moved late on Sunday to temporarily suspend competition rules in the fuel sector so companies can share information and coordinate fuel supplies to highly affected regions.

This comes after Prime Minister Boris Johnson announced plans to issue three-month visas for 5,000 HGV drivers and 5,500 poultry workers in an attempt to keep supermarket shelves stocked and gas retailers better supplied, although the UK’s Road Haulage Association (RHA) remains sceptical of the effectiveness of the measure: they stated the temporary visas would barely scratch the surface of a 100,000 shortfall that has been exacerbated since Brexit.

Newspapers also reported that Johnson may draft in the army to drive tankers around the country to supply petrol stations. The food and fuel shortages add to the pile of risks for sterling in the short to medium term, considering the furlough programme that paid the wages of over 11 million employees ends this week. The currency impact arguably is muted at the moment given markets’ repricing of rates following last week’s hawkish Bank of England, but markets will carefully watch the food and fuel challenges in the coming weeks.