Geoffrey Minne, Economist at ING, suggests that the leaders of the Spanish Socialist Party (PSOE) and Ciudadanos have agreed to form a coalition and will try to get parliamentary agreement next week. Key Quotes “Ciudadanos called for a set of five key reforms of the Spanish Constitution to improve accountability of politicians and empower citizens in the decision making process. These reforms were a condition to join the government. With PSOE and Ciudadanos now having agreed on a government programme, the most difficult part is still ahead. Together the PSOE and Ciudadanos only have 130 seats in parliament (out of 350). The coalition now needs at least the abstention of the liberal PP (apparently put aside in the negotiation process) or the anti-capitalist Podemos (still asking for deeper reforms and a Catalonian referendum) to receive a parliamentary majority. So unless a surprise guest would rescue this coalition or enough other parliamentarians stay absent, snap elections on 26 June remain the most likely scenario. On the economic side, last year ended on a positive tone, notably thanks to dynamic job creation and low energy prices, extending the momentum for domestic demand. In 2016, a major slowdown has not materialised yet but several indicators have been on the downside since the beginning of the year. The recovery could start to fade because of political uncertainty, a less dynamic Eurozone economy and financial market turmoil. In January, inflation fell back into negative territory, essentially because of a cut in electricity prices. In February, energy prices should maintain the inflation rate under the 0% YoY threshold and we expect the HICP to be at -0.5% YoY. Prices in the “Transport” and “Housing” categories are to a large extent influenced by energy prices and represent slightly less than 30% of the consumer price index. The current trend therefore goes hand in hand with commodities prices. In other categories, only “food and non-alcoholic beverages” exceeded 2% YoY last month and therefore even the core inflation rate is not expected to reach its pre-crisis level in coming months. All in all, no green light is expected on the political scene and the gridlock should continue to be a burden for financial markets and economic sentiment, at least until end June.” For more information, read our latest forex news.