Euro Drifts Lower As German Coalition Talks Collapse

 | Nov 20, 2017 08:03AM ET

Euro drifts lower as German coalition talks collapse

  • The euro edged lower during the Asian morning Monday, following some political updates over the weekend from Germany. Talks on forming a coalition government collapsed, after the liberal FDP walked away from the negotiations that began towards the end of September. This development likely heightened political uncertainty in Germany and by extent in the EU, as what happens next is not clear. Merkel is now faced with two choices: form a minority government, or go to early elections.
  • This is a discouraging development for investors looking for institutional reforms in the EU, as it is likely to delay the implementation of any such reforms, at the least. As for the euro, news of a minority government could be relatively neutral for the currency in my view, as this may be more or less priced in by now, following the aforementioned tumble during the Asian day. On the other hand, news of early elections could increase uncertainty even further and thereby, spell more bad news for the common currency in the short-run. Overall, with the ECB out of the spotlight for now, a strong argument can be made that developments on the political front are likely to dictate the euro’s near-term bias. Who governs Germany in particular over the next years could play a major role in determining whether the EU will push for much-needed reforms, like creating a Eurozone budget, which French President Macron has repeatedly called for.
  • EUR/USD tumbled during the Asian day Monday, to break below the support (now-turned-resistance) level of 1.1760 (R1). During the European morning, the price is testing the short-term upside support line taken from the low of the 7th of November. Given that the rate continues to trade within the sideways range between 1.1680 (S1) and 1.1825 (R2), the near-term outlook remains flat for now. A clear break below the aforementioned upside support line and the 1.1680 (S1) are needed to turn the picture to negative. On the upside, we would need to see a close above the 1.1825 (R2) hurdle before we assume that the slide that began on the 8th of September was a corrective phase and that the picture is back to positive.


Oil rebounds as OPEC gathering draws closer

  • Oil prices rebounded sharply on Friday, amid news of a major oil spill in South Dakota, and following some optimistic comments on Thursday from Saudi Arabia’s energy minister. The minister once again signaled his nation’s willingness to extend OPEC’s current output-cut deal when the cartel meets again on the 30th of November. Given our proximity to this gathering, oil prices are likely to remain headline-driven over the next days. In terms of market expectations, producers are widely anticipated to extend the current deal by 9 months, to December 2018. As such, the big question facing traders now is whether the cartel will deliver something over and above what is currently expected, such as a 12-month extension or deeper cuts in production. Any hints from key officials that they may consider something more than a simple 9-month extension could keep prices supported over the next days. On the other hand, anything that places the prospect of such an extension in doubt could work against prices.
  • WTI rebounded from near the critical barrier of 55.30 (S2) on Friday, to find resistance marginally below the 56.90 (R1) resistance zone. The 55.30 (R1) level acted as the upper bound of the sideways range we’ve discussed several times in the past, which capped prior oil gains. As such, the fact that we are still trading above that barrier keeps the picture positive. Any further optimistic comments from OPEC officials over the next days could keep prices supported. A clear break above 56.90 (R1) could set the stage for more bullish extensions, and initially aim for a test near the 57.70 (R2) resistance obstacle. On the downside, a close below 55.30 (S2) is needed to bring the price back within neutral territory, and lead me to begin examining the case for further declines.
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Today’s highlights:

  • The economic calendar is empty, with no major events or indicators due to be released. The only event that could attract some attention is a speech by ECB President Mario Draghi.


As for the rest of the week:

  • On Tuesday, the RBA will release the minutes of its November policy gathering. On Wednesday, we will get the minutes from the FOMC November meeting while on Thursday, the ECB will release the minutes of its own gathering in October. We will also get Eurozone’s preliminary Markit manufacturing and services PMIs for November, as well as the UK 2nd estimate of GDP for Q3. Finally on Friday, we only get Germany’s Ifo survey for November.


EUR/USD