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EUR/USD down after German election, but not yet out

Although Angela Merkel’s Christian Democratic Union (CDU) party won the most votes (at 33%) on Sunday’s German federal election, as widely expected, the margin of victory was a massive disappointment for both Merkel and her conservative party’s supporters. From the last federal election in 2013 to Sunday’s tally, the CDU lost around 8.5% of the vote share. This significant loss of support was not transferred primarily to Martin Shulz’s Social Democratic Party (SPD), as might have been expected, but instead to the anti-immigration and anti-EU party, Alternative for Germany (AfD). AfD garnered 13% of votes – 7.9% more of the vote share than it had in 2013, placing the far-right party in a comfortable third place after the CDU and SPD. While the CDU has secured 246 seats in the Bundestag, the AfD now has a very substantial 94 seats where before it had none. This is the first time that a far-right party has been represented in German parliament since World War II. Therefore, while Merkel has certainly secured a fourth term as Chancellor, the prominent rise of the AfD has created a serious potential threat to the European Union and euro.

As we noted prior to the election, the immediate risk to the euro was in just such an outcome, where the AfD would garner more votes than expected, even if the party would have little to no chance of taking part in a coalition government with the CDU. This worst-case scenario for the euro as a result of the election has played out, and the shared currency took a significant hit in the immediate aftermath, particularly after Merkel expressed disappointment at the loss of support for her party to the nationalists.

The fall in the euro was pronounced against several other currencies, including the Japanese yen and US dollar. In the case of EUR/USD, the currency pair dropped to its recent range lows below 1.1900, tentatively dipping below both its 50-day moving average and a key uptrend line extending back to mid-April, and has put some pressure on the sharp bullish trend that has been in place for much of this year.

While the rise of the nationalist AfD party does indeed pose a threat to the long-term viability of the euro, as Germany is a dominant member of the EU and Eurozone, that threat is still very limited at the current time. Though the far-right party has now dramatically increased its voice in the German parliament, the clear core of power will remain for now with Merkel, the CDU, and the new coalition government that excludes the AfD. Therefore, after the current pressure on the euro plays out in the short-term, the euro-negative impact of the election is likely to fade. While further residual pressure in the short-term could push the pair down to key support around the 1.1700 level, any sustained rebound back above 1.1900 should lead to a resumption of the bullish bias towards the 1.2100 resistance target once again.

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