Here's why the pound is climbing against the euro today

 
Emma Haslett
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Merkel may be forced to call another election. (Source: Getty)

The pound climbed against the euro in early trading after political uncertainty sent the single currency lower.

Sterling rose 0.3 per cent to €1.1248 in early trading, after coalition talks broke down between Angela Merkel's ruling Christian Democrat (CDU) party, the Greens and the pro-business Free Democrats (FDP).

However, the euro managed to climb 0.1 per cent against both the dollar and the yen, to $1.1800 and ¥132.33 respectively.

Read more: Germany stuck in limbo after coalition talks collapse

Euro's mixed morning
Sterling -0.3% Dollar +0.1%
Yen +0.1% Swiss franc 0.0%

The failure to strike a deal throws Europe's largest economy into confusion at a crucial time for the continent, which is experiencing political instability in several countries.

"The first is that the [original] coalition is revived, which seems unlikely. The second is that the CDU/Social Democratic Party (SPD) coalition is revived but that seemed to be what the electorate were unhappy with at the election. ," said Kit Juckes, global fixed income strategist at Societe Generale.

"The other two - fresh elections or the CDU ruling as a minority government - are untried in the modern era. The only real enthusiasts for new elections are the [far-right] Alternative for Deutschland (AFD), who might build on their strong showing last time around."There are, I suppose, four plausible outcomes in Germany."

"Maybe what markets are saying overall is that minority government or further coalition talks are fine, as long as the economy is growing."

Later today, all eyes will be on European Central Bank president Mario Draghi, who is expected to testify at the European Parliament.

Read more: A weakened Merkel leaves EU integration on the back-burner

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