SPD’s Support Of Coalition Deal Pushes EUR/USD Exchange Rate Higher
The Euro to US Dollar exchange rate (EUR/USD) has risen by 0.6% today, thanks to growing optimism among Euro traders.
As has often been the case in recent weeks, the Euro has appreciated because of hopes that German coalition talks will conclude satisfactorily.
The latest update has seen the SPD party, Angela Merkel’s main hope at forming a coalition, reach an agreement after a lengthy debating session.
Merkel’s CDU/CSU union and Martin Schulz’s SPD have tentatively agreed to form a third ‘grand coalition’ to govern the country, although this is not a done deal just yet.
The SPD’s membership still needs to approve of this arrangement, but for now at least the prospect of a minority government or second election has been averted.
The main issue for SPD members is whether the party is able to have its say in such a partnership, as previous perceptions are that the CDU/CSU union dismissed SPD ideas.
Highlighting this problem, Die Zeit Publisher-Editor Josef Joffe said;
‘The real hurdle…(is) when the SPD rank and file will have to vote on approval.
The mood of the party faithful is heavily skewed against another grand coalition’.
Eurozone Trade Balance Beats Forecasts, Pushing EUR/USD Exchange Rate Up
As well as political optimism pushing the Euro higher today, the single currency has also been supported by better-than-expected trade balance data.
The Eurozone-wide reading for November rose from an 18.9bn surplus to 26.3bn, exceeding estimates for a 22.4bn figure.
Looking at the month-on-month specifics, exports increased by 3.4% while imports rose by 1.6%.
The Eurozone has maintained a healthy surplus since February 2017, so this news has had an overall positive effect on confidence in the Euro.
US Dollar to Euro Exchange Rate Slides after Tax Cut Criticism
In addition to falling by -0.6% against the Euro, the US Dollar has also posted sizable losses against peers like the Pound and South African Rand.
This US Dollar weakness stems from the latest analysis of nationwide tax reform plans, which are gradually being implemented after recent approval in the Senate.
Federal Reserve official William Dudley has cautioned that the tax cut plans may end up ‘overheating’ the US economy, where GDP grows uncontrollably quickly.
This might lead to a dangerously fast pace of Fed interest rate hikes to keep up with inflation and in Dudley’s words, ‘The risk of a hard landing will increase’.
Slowing German Inflation Could Trigger EUR/USD Exchange Rate Decline
The Euro has made a strong start to weekly trading, but risks a decline against the US Dollar on Tuesday morning when German inflation rate data comes out.
For the finalised December reading, estimates are for a slowdown from 1.8% to 1.6%.
To some, the German economy can be equated to the overall Eurozone economy, so slowing inflation in this area could result in a Euro devaluation.
Tuesday won’t bring much US data to excite, as the NY manufacturing index isn’t expected to show a major change in January.