As with most of the non-US dollar currencies, the low point for the EUR on Tuesday came early in the European afternoon as nervousness mounted around what lay in store for US equity markets. As a much-feared third consecutive day of extreme downside pressure failed to materialize, EUR/USD rallied to just about regain a 1.24 handle late in the New York day. The overnight session in Asia was exceptionally quiet with barely 20 pips separating the high and low in EUR/USD, although as investors try to digest news of the new Coalition government in Germany, the pair is down around 1.2340 this morning in Europe.
After protracted talks, Angela Merkel's conservatives have finally made a deal with the Social Democrats over a new coalition contract in Germany. Negotiators from the Christian Democratic Union (CDU), their Bavarian partners the Christian Social Union (CSU) and the center-left Social Democratic Party (SPD) have thrashed out a contract for a new grand coalition government, in all likelihood led once again by Angela Merkel. German news outlets including ARD and Der Spiegel reported just before 10am this morning - the third day of "extra time" - that a final contract had been agreed, to be formally announced later in the day. The SPD leadership confirmed the reports in a group WhatsApp message, which began, "Tired. But satisfied."
At the risk of sounding like a two-handed economist, on the one hand there is some relief that Germany might avoid a fresh, destabilizing Federal Election, but on the other is a concern that Ms Merkel might have conceded too much to the left-wing SPD. Early reports suggested that the SPD would be handed the Finance Ministry - a major victory for the Social Democrats - while CSU leader Horst Seehofer, one of the most conservative figures on Merkel's side, would become Interior Minister. The SPD also look set to keep control of the Foreign Ministry and the Labor Ministry, with party leader Martin Schulz reportedly keen to be Foreign Minister. As all this news is digested, the EUR opens in North America at USD1.2345 and EUR/CAD1.5455.