EUR/USD – Euro Soars to 3-Year High as German Coalition Talks Show Progress

On Friday, EUR/USD has posted strong gains for a second straight session. Currently, EUR/USD is trading at 1.2119, up 0.73% on the day. The catalyst for the boost was a report that German coalition talks have made substantial progress. On the release front, there are no major releases out of the eurozone. In France, French Final CPI improved to 0.3%, matching the forecast. This marked a 4-month high. In the US, it’s a busy day, with the release of CPI and retail sales reports.

The euro rally has continued on Friday, following reports from Germany that Angela Merkel’s conservative bloc and the Social Democrats have agreed on a coalition blueprint. This ends months of political uncertainty,which has eroded Merkel’s standing and also sidelined Germany on issues such as Brexit and political reform in the eurozone. Still, the talks are only in the preliminary stage, and further negotiations will be continuing in the coming weeks. The conservatives and Social Democrats composed the last government, and Merkel and Social Democrat leader Martin Shulz will be trying to drum up support for the deal.

Euro at Three Year High on Possible Coalition Deal

The ECB minutes, released on Wednesday, were hawkish in tone. Policymakers said that risks to the current outlook were to the upside, which could necessitate a gradual shift in guidance in the next few months. As for the eurozone, the minutes stated that the economy was displaying “continued robust and increasingly self-sustaining economic expansion”. When the ECB announced the taper in late 2017, it extended the program until to September 2018. However, with the strong economy, there are signals that QE may not be extended beyond September. On December 30, Benoit Coeure, who is in charge of the program, said on Dec. 30 there was a “reasonable chance” it would not be extended. On Sunday, Bundesbank President Jens Weidmann said the ECB should set a date to end QE. Talk of an end to QE has raised speculation that the ECB could follow up with a rate hike late in 2018. This would be a monumental move, as the ECB hasn’t raised rates since 2011.

An interest rate increase from the ECB? That kind of language hasn’t been bandied about for years – the last time that the ECB raised rates was in 2011.  However, there is growing speculation that the Bank could raise rates, if it decides to terminate its massive stimulus program (QE) in September. This month, the ECB started its taper of the program, reducing monthly purchases from EUR 60 billion to EUR 30 billion. With the eurozone economy continuing to perform well, the ECB has been sending out signals that the stimulus program could end in 2018. On December 30, Benoit Coeure, who is in charge of the program, said on Dec. 30 there was a “reasonable chance” it would not be extended. On Sunday, Bundesbank President Jens Weidmann said the ECB should set a date to end QE.

ECB may start tweaking policy message in early 2018

EUR/USD Fundamentals

Friday (January 12)

• 2:45 French Final CPI. Estimate 0.3%. Actual 0.3%
• 4:00 Italian Industrial Production. Estimate 0.6%. Actual 0.0%
• 8:30 US CPI. Estimate 0.1%
• 8:30 US Core CPI. Estimate 0.2%
• 8:30 US Core Retail Sales. Estimate 0.4%
• 8:30 US Retail Sales. Estimate 0.5%
• 10:00 US Business Inventories. Estimate 0.3%
• 11:30 German Buba President Weidmann Speaks

*All release times are GMT

*Key events are in bold

EUR/USD for Friday, January 12, 2018

EUR/USD for January 12 at 5:20 EDT

Open: 1.2031 High: 1.2137 Low: 1.2031 Close: 1.2119

EUR/USD Technical

EUR/USD inched higher in the Asian session and posted considerable gains in European trade

• 1.1961 is providing support
• 1.2165 is the next resistance line

Further levels in both directions:

• Below: 1.1961, 1.1876, 1.1777 and 1.1657
• Above: 1.2165, 1.2200 and 1.2286
• Current range: 1.1961 to 1.2165

OANDA’s Open Positions Ratio

EUR/USD ratio is showing little movement in the Friday session. Currently, short positions have a majority (62%), indicative of EUR/USD reversing directions and moving to higher ground.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.