Pound spikes versus euro on German constitutional crisis and resumption of Brexit talks

The pound jumped against the euro on Monday (20 November), following a breakdown of talks in Germany aimed at forming a coalition government, ahead of the next round of Brexit negotiations between London and Brussels.

At 12:09pm GMT, the pound was up 0.34% against the euro changing hands at €1.1249, after talks on forming a coalition government in Germany collapsed, leaving incumbent chancellor Angela Merkel facing her biggest political challenge in 12 years in office.

The free-markets supporting FDP pulled out after four weeks of talks with Merkel's CDU/CSU bloc and the Greens, with party leader Christian Lindner saying there was "no basis of trust" between them.

Speculation is rife in the German media that President Frank-Walter Steinmeier, who has the power to call general elections, might well do so over the coming weeks.

Concurrently, as the euro weakened, the commencement of the next round Brexit talks was also seen supporting the pound.

Mihir Kapadia, chief executive officer of Sun Global Investments, said the German situation presented a classic paradox for the pound, despite intraday gains.

"The news in Germany is also bad for the UK as Merkel is minded to take a more pragmatic view in the Brexit negotiations. Instead, she will now be preoccupied with domestic issues and unable to assume a leadership role in the EU. The vacuum will be filled in part by a more pro-EU stance by French President Emmanuel Macron."

In the wider context of Brexit talks, many City forex traders are focussing on more benign soundbites, with Chancellor Philip Hammond noting that the UK will submit proposals on how to settle its EU divorce bill before an EU summit next month.

Hans Redeker, global head of FX strategy at Morgan Stanley, said Prime Minister Theresa May's proposal for the final exit bill to the EU should be watched carefully. "The May government walks a fine line between an exit bill high enough to appease EU member states but low enough to assuage Tory party members. A false step could raise the risk of Tory party schisms and early UK elections."

Meanwhile, the pound also strengthened across the intraday FX notching gains of 0.29%, 0.34%, 0.23% and 0.39% against the US dollar, Canadian dollar, yen and Swiss franc exchanging at $1.3255, CAD$1.6939, JPY148.575 and CHF1.3122 respectively.