The euro is up slightly this morning after falling yesterday. Despite the significance of German coalition talks breaking down, the reaction in the euro has been fairly mild. In a broader commentary on German politics, we argue that the euro remains in a bull market thanks to strong GDP growth. As such, the fallout from yesterday's events may not affect the euro in the short-term. Instead, the Eurozone risks the possibility of a full-blown financial crisis when the next downturn arrives. Given the region's high debt load and economic disparities between northern and southern member countries, Germany is expected to push for EU-wide institutional reforms. If Germany turns inwards, the entire Eurozone is therefore at greater risk in the future. Our short-term outlook on the euro remains neutral.
The EUR/USD exchange rate is now trading above 1.1740. Looking at EUR/JPY, the pair is flat today and is currently trading just above 132.0. The euro is down against the pound, with EUR/GBP now trading above 0.8850.
This week’s Eurozone events and economic data includes a speech by Draghi, the EU’s financial stability review, Eurozone Markit PMIs and German IFO numbers. On Monday Draghi expressed his optimism for higher wages and backed Germany's stance on EU deposit insurance. German producer prices matched expectations (2.7%). Later today, we’ll the EU’s financial stability review. On Wednesday, we’ll see Eurozone consumer confidence. On Thursday we’ll see German GDP and Eurozone Markit PMIs. We’ll also see the ECB’s policy meeting accounts. Lastly, on Friday we’ll see IFO survey data. Last week, Eurozone GDP numbers met expectations.