by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EST]

Coalition deal in Germany: This morning, Chancellor Merkel announced that an agreement has been reached to form a conservative coalition with the Social Democrats (SPD).  This agreement will likely pave the way for Merkel to finally form a new government after months of negotiations following the results of the September election.  Recently, there has been speculation that Merkel may step down from her role as chancellor due to her inability to form a government; this agreement has quelled those fears.  The euro appreciated immediately after the news broke.  Although an agreement has been reached, it still needs to be finalized by members of the SPD during its party conference on January 21.

Pakistan intelligence: Yesterday, Pakistan announced it would withhold key ground intelligence from the United States in response to the State Department’s decision to withhold security aid.  The U.S. has accused Pakistan of harboring Afghan Taliban and has demanded that Pakistan do more to assist in the fight against terrorism if it would like to receive additional aid.  The lack of intelligence is likely to hamper U.S. war efforts in Afghanistan; however, the U.S. will still be able to gather intelligence from air surveillance and intercepted communications.  Pakistan’s retaliation is likely to escalate tensions and could push it to strengthen its relationship with China.  The waning relationship with Pakistan could be further evidence that the U.S. is pivoting its foreign policy toward improving relations with India, which it sees as a counterweight to China’s influence throughout Asia.  During a press conference in Norway, President Trump singled out India, in addition to Russia and China, as a country with which he would like to build a working relationship.  Furthermore, Pakistan and India have always had a tense relationship since Pakistan split from India in 1947.

DACA deal: Yesterday, a bipartisan deal to protect those who were brought into the U.S. as children illegally, also known as dreamers, was rejected by the president.  Clauses that caught the president’s ire involved maintaining the diversity lottery in developing countries, which the president has openly opposed in the past.  After hearing about its inclusion in the bill the president gave a somewhat salacious response questioning the logic behind diversity lotteries.  Those comments have been widely reported elsewhere, so we will not repeat them here, but instead we will focus on how it may impact his legislative agenda going forward.  The president’s remarks could make it harder to reach a deal on immigration in the future, which has held back budget talks.  In addition, Democrats will likely use President Trump’s harsh rhetoric as fodder for their base in the run-up to the mid-term elections.

Nuclear deal lives another day: President Trump is expected to extend sanctions relief to Iran on the condition that the U.S. and its allies come up with a better nuclear deal.  The president has never been a fan of the agreement, labelling it the “worst deal ever.”  There was some speculation that the president would pull out of the deal due to the Iranian government’s response to recent protests in the region.  We will continue to monitor this situation.

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