Update 2: No statement from Merkel tonight (contrary to earlier reports) however Seehofer did speak to reporters and said that he offered to quit as German interior minister, and that he wants to avoid Merkel government collapse.

He also added that he will stay in politics if Angela Merkel’s CDU backs down in the two parties’ deadlock over migration, DPA reports.

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Update: After several hours of negotiations, it appears that Chancellor Merkel and CSU leader Horst Seehofer have been unable to reach an agreement, and according to N-TV, Seehofer told the CSU board meeting the he offered to resign as Germany's interior minister and as CSU party chairman amid the clash over Germany's migration policy, sparing Merkel the need to fire him and potentially preserving the political alliance.

Seehofer and his party spent hours finding a response to a hard-fought agreement to reduce migration into the European Union and so-called "secondary migration" between member states hammered out by Merkel at a leaders' summit last week. Now "he wants to step down as party chairman and interior minister" as he enjoys "no support", the sources said.

However, this is where things get complicated because dpa adds that CSU caucus chief Alexander Dobrindt opposes the resignation and will not accept it, putting Germany at a political impasse and potentially in a political crisis in which the CDU and CSU alliance may now break. According to N-tv the meeting of the CSU governing body is now suspended.

If Seehofer does resign, it is unclear whether the CSU would seek to remain in coalition with Merkel's CDU and offer a replacement interior minister. Alternatively, it could break up the two parties' decades-long alliance, effectively depriving Merkel of her majority in parliament and pitching Germany into uncharted political waters.

According to Spiegel editor Melanie Amann, Seehofer sees few options for the CSU: Either to stand firm on the immigration dispute and risk undermining the ruling coalition, or to back down and damage the party’s credibility, reports Spiegel editor Melanie Amann. The third option, offering to leave his post, was possibly in an attempt to boost party members' support of his strategy.

Earlier, Bavarian state premier Markus Soeder, a leader of the hard-line faction, told the closed-door meeting that the CSU doesn’t want to bring down Merkel’s government but will stand up for what is right, dpa reported.

What happens next is up to the CSU, which faces a stark choice: if it does not want to lose in the Bavarian-election this coming October, it needs to confront Merkel on the migrant crisis, or risk losing even more votes to the AdF as described below.

Meanwhile, according to a CDU statement, Angela Merkel will pursue the migrant pacts reached with its EU partners. As Bloomberg adds, Merkel faced down an allied party that’s demanding she tighten Germany’s defenses against migration, escalating a political crisis could leave her without a parliamentary majority.

The news has sent the EUR surging, perhaps on the assumption that a political crisis in Germany has been averted with Seehofer's resignation, instead of his termination, although if the CSU refuses Seehofer's resignation, leading to a political impasse, it is unclear just how the German ruling coalition will continue at this point.

In other words, the key question now is whether CSU is still in a coalition with the CDU. Judging by the EUR reaction, the answer appears to be yes, for now, although as Bloomberg's Mark Cranfield notes, "EUR/USD's rebound on last week's EU migrant deal looks like being short lived if Interior Minister Horst Seehofer's resignation is accepted. This would weaken Angela Merkel's grip on power as the ruling coalition -- which was already shaky -- threatens to split apart."

The pair looked vulnerable even after Friday produced its best gain in June because it failed to recapture the 1.17 handle. That suggests the broad 1.15-1.17 band prevails for the near term. Short-dated volatility also avoided spiking higher. As European traders wake up to the Seehofer announcement, they are likely to push the euro toward the lower end of that recent range.

Translation for the US traders: don't be surprised if the EUR is below 1.16 when you wake up on Monday following a deterioration in Germany's political crisis.

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EARLIER:

German Chancellor Angela Merkel is fighting for her political future on Sunday desperate to placate conservative rebels in her ruling coalition over immigration with a last-minute European deal, even as central EU states called the deal into doubt. If she is unsuccessful in convincing her political ally, CSU leader Horst Seehofer, that the deal will stick and limit immigration into Germany, she faces a political crisis that could end her parliamentary majority and, potentially, her career.

With CSU's two week ultimatum to reach an agreement on pushing back immigrants into Germany to their nations of origin set to expire tonight, Merkel's centre-right CDU party and its conservative Bavarian CSU allies are holding separate meetings to weigh the results of last week's EU summit, which agreed on collective measures by the bloc's 28 members to reduce immigration, AFP reports.

Merkel hopes the deals with European migrant discontents - mostly Italy which threatened to veto last week's summit until the last minute - and German neighbors will deter Interior Minister and CSU leader Seehofer from defying her by turning away at the border asylum seekers already registered in other EU nations. Such a unilateral move would force her to fire him, prompting a CSU walkout that would cost her her majority in parliament.

According to a document sent to coalition partners, Merkel sought to assuage the hardliners with deals with 16 other countries to return already-registered migrants if they reached Germany. The EU and bilateral deals were "only possible because the chancellor enjoys respect and authority throughout Europe," Germany's EU Commissioner and CDU politician Guenther Oettinger said in an interview with the Frankfurter Allgemeine Sonntagszeitung weekly. "That is very valuable for Germany, no-one should destroy it."

The German leader, who recently won a historic, third mandate, has warned that the issue of migration could decide the very future of the EU itself.

But a potential dealbreaker emerged when several central European nations including Poland, Hungary, the Czech Republic and Slovakia denied they had agreed to accept returned migrants .

Over the weekend, signs of reconciliation emerged after Merkel and CSU head Horst Seehofer met at the chancellery in Berlin late Saturday to discuss how to avoid a government crisis, according to Bild, and while Merkel’s CDU party published a position paper saying “we want to further reduce the number of refugees arriving in Germany”, it also caused new conflict with its statement that 14 EU countries had made a “political commitment” to take back refugees who originally arrived on their soil but moved on to Germany. As a result, Germany's ARD reported that the government leaders in the Czech Republic, Hungary and Poland denied having made any commitment at the summit.

This has prompted fears that a tentative deal could fall apart in the last minute: "Given the different statements from some EU member countries, one can doubt whether all of the decisions at the EU Council will become reality," head of the CSU parliamentary group Alexander Dobrindt told Bild am Sonntag newspaper.

As a reminder, in a marathon overnight session on Friday, EU leaders agreed to consider setting up "disembarkation platforms" outside the EU, most likely in North Africa, in a bid to discourage migrants and refugees boarding EU-bound smuggler boats. Member countries could also create processing centres to determine whether the new arrivals are returned home as economic migrants or admitted as refugees in willing states.

At the national level, Merkel also proposes that migrants arriving in Germany who first registered in another EU country should be placed in special "admissions centres" under restrictive conditions, according to a document she sent to the CSU and coalition partners the Social Democratic Party (SPD). "There will be a residency obligation reinforced with sanctions," the document states.

On Friday, a happy Merkel told reporters that the hard won EU and bilateral deals were "more than equivalent in their effect" to Seehofer's demands.

And, indeed, the initial signs were positive, with the CSU's Bavarian state premier Markus Soeder saying on Saturday that "what has been achieved in Brussels is more than we originally thought.

But as German dpa news agency adds on Sunday, Seehofer himself was hardly as enthusiastic and said he was not happy with the results of EU summit which he said is not as effective as turning away unilaterally at Germany's borders people who have registered already in another EU country. Seehofer also rejected so-called "anchor centres" within Germany.

Meanwhile, the opposition from the 4 core Central European nations prompted Alexander Dobrindt, the CSU caucus leader in the national parliament in Berlin, to warn that it raises doubts about whether the EU deal on migration will be fully implemented.

The stakes of today's discussions are momentous not only for Merkel, but also for the CSU, which fears losing its absolute majority in Bavaria's state parliament. As AFP eloquently notes, "the "Free State" with its beer-and-lederhosen Alpine traditions, powerful industries and impenetrable dialect has a more conservative bent than other German regions."

The big danger for the CSU is that if it is seen as caving too far, it may lose even more support to Germany's the anti-refugee, anti-Islam phenomenon, the AfD, which succeeded in entering Federal parliament for the first time after the last German elections, at the expense of establishment parties. Opinion polls point to the AfD making a similarly spectacular entrance to Bavaria's parliament in October.

The big problem for Seehofer is that weeks of "Merkel-bashing" have failed to help the CSU, as a Forsa poll last week showed around 68% of Bavarians backed Merkel's quest for a Europe-wide answer to migration rather than Germany going it alone.

How the CSU resolves this dilemma will impact the fate of Merkel, and could have dramatic consequences for the future of Europe.

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Finally, putting it all together is the following twitter thread from Lars Pelleniat laying out the various possible outcomes:

In Germany many call #Seehofer "Drehofer"(Turning-Hofer, for talking right, but later following #Merkel).

But if Seehofer turns again, his #CSU-party will get a bloody nose in the #Bavarian #election in October & lose many votes to the #AfD!#AsylStreit #CDU #CSU — Lars Pellinat (@Lars9596) July 1, 2018

4. I don't yet see that the #CSU will break away (just too big a step), but the pressure on #Merkel will increase - In the past year by year, now week by week!

If #CSU/#CDU are smart (Issue = Too many Yes-Men) they get rid of her. If Merkel was smart she would resign. #Asylstreit — Lars Pellinat (@Lars9596) July 1, 2018

6. I think that will be the FINAL CHAPTER of #Merkeldaemmerung: In order to not drop close to 20% (now 31%, was over 40% once) the #CDU will suddenly discover the failings of former Saint #Merkel and send her packing! — Lars Pellinat (@Lars9596) July 1, 2018