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In view of Tim Riddell, Research Analyst at Westpac, Merkel’s coalition disputes highlight broader issues around EU’s migrant policy and German proposals could incite border closures within EU, restricting the free movement of people.

Key Quotes

“This may not trigger existential concerns for EU/EUR, but it will impede potential for any structural reforms. The burden of supporting growth will remain on ECB, extending their guidance. That would cap both EU rates and EUR and so there is minimal scope for any policy change into ECB’s 26th July meeting.”

“Increased trade tensions would also weigh on EU growth potential. June PMIs may have offered some hope for improving EU activity, but data suggests, as ECB’s bulletin intimated, that a more structural, rather than temporary, slowdown is underway. Industrial production and ZEW surveys are important given Germany’s soft capital orders for May.”

“Scope for EUR rebounds is dependent upon politics, trade and growth. This suggests that EUR will struggle towards the upper end of its possible 1.12-1.19 range.”