The Euro is Down and the Dollar up despite recent political developments - why?

Foreign exchange markets have taken a rather benign approach to the two major political issues we thought might have an impact on trading at the start of the new week - the US government shutdown and the SPD party in Germany agreeing to enter coalition talks with Angela Merkel's CDU.

In short:

1) The US government shutdown was expected to lead to a notably weaker Dollar. It hasn't.

2) News that Germany's SDP have voted to move coalition talks forward should have boosted the Euro. It hasn't.

"The Senate will resume negotiations on Monday, with a bill to reopen the government to be voted on noon US EST, according to newswire reports. Signs that the US government shutdown could be short lived kept G10 FX quiet in Asia," says Manuel Oliveri with Crédit Agricole.

After the US government was shut down on Friday night, lawmakers worked through the weekend to find a compromise that would end the impasse.

Ahead of the new week, the Senate agreed to hold a vote at noon Monday on a short-term bill that would end the shutdown immediately and fund the government until 8 February.

"The latest comments from political leaders suggest that Republicans and Democrats may be getting closer to a compromise. It is, however, unclear whether this bill will gain enough support to pass both chambers of congress," notes Dr. Vasileios Gkionakis, an economist with UniCredit Bank.

With regards to the Euro and the German coalition saga, "despite the SPD voting to negotiate with the CDU/CSU to form government, which brought further modest relief to political uncertainty in Germany, the EUR/USD has fully reversed its Friday spike on the US government shutdown news," notes Oliveri.

"The Euro rallied only temporarily overnight after delegates of Germany’s Social Democrats voted in favour of formal coalition talks Chancellor Merkel’s CDU/CSU. The relative closeness of the vote, however, confirmed deep divisions within the SPD on whether to proceed with another four years as a junior partner in a 'grand coalition'," says Hann-Ju Ho with Lloyds Bank.

So what we can say is markets reckon the US government shutdown is ultimately likely to be a short-term phenomenon and the SPD agreeing to pursue coalition talks was never really in doubt.

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