Merkel makes compromises to get Coalition in Place
The Euro has seen gains against the majority of major currencies of late due to positive economic data and the news that a coalition is to be formed in Germany. Political uncertainty historically weakens the currency in question so the coalition in Germany has been a catalyst for Euro strength. Germany is the engine room of the EU so this has caused extra impetuous.
Yesterday it was agreed that the current German Chancellor, Angela Merkel’s Conservatives agreed to a number of compromises in order to put the Grand Coalition back in place with the Social Democrats. The most significant concession being the finance ministry being handed to the Social Democrats putting an end to forced austerity to Germany’s Euro Zone policy.
This means there could be more plans for expansion with intentions of investment into a European monetary fund beginning to intensify. Its purpose would be to create added incentives to those willing to invest in the bloc. Depending on the rewards offered and it’s popularity it could create substantial Euro strength. This would be gradual gains however and not an immediate spike.
Inflation levels key to a change in Monetary Policy
Quantitative Easing (QE) is pumping money into an economy in order to stimulate growth. The current QE program seems to be having the desired effect in the Euro Zone with a host of positive data releases.
There is currently €30bn going in every month, down from €60bn previously. With a strong economy there is less need for QE and reductions in QE can mean significant strengthening for the Euro. Inflation is struggling at present and Draghi has indicated that QE will continue until we see inflation heading towards it’s 2% target. CPI is the key measure of inflation so keep a close eye on this release as this could be the clue to a drop in QE.
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