EUR/USD Analysis & News

• SPD Wins Majority of Votes
• The Greens & FDP to Decide Between Traffic Light or Jamaica Coalition
• Euro Sees Muted Impact After Election Sees Status Quo Maintained

German Election Shows Victory for Centre-Left

The results: According to preliminary results, the SPD led by Olaf Scholz won the largest share of votes with 25.7% (+5.2ppts). The main opposition, the CDU/CSU were runners up with 24.1% (-8.9ppts), marking a poor night for the conservatives. Meanwhile, there was a big win for the smaller parties with the Greens winning 14.8% (+5.8ppts) of the vote and the FDP on 11.5% (+0.7%ppts).

German Election Results

Source: The Guardian

Coalition Scenarios: Following the election result, this paves the way for several outcomes, in which the Greens and FDP will decide who will become the next chancellor. The two possible outcomes are a trafflic light coalition, involving the SPD, Greens and FDP or Jamaica coalition with CDU/CSU as opposed to SPD. That said, SPD’s Scholz has claimed election victory, noting that a coalition agreement is possible between his party, alongside the Greens and FDP.

German Election Potential Outcomes

Source: The Guardian

Market Reaction: As the election essentially confirms the status quo will be maintained, the Euro has seen a relatively muted reaction. While the most fiscally expansive outcome of the SPD, Greens and the Left has meant that German yields are also relatively stable. Looking at the chart however, key support sits at 1.1665 with the 1.16 handle below.

EUR/USD Chart: Daily Time Frame

Source: IG

What Happens Next?: Reaching an agreement to form a coalition is unlikely to be found any time soon and instead take several months. As a reminder, following the 2017 Federal Election, a coalition had not been reached until 6 months later. I suspect the impact on European assets from the election will remain limited with instead near term focus on the current uncertainties pertaining to Evergrande, alongside the mini-tantrum in the fixed income space, in which US 10yr yields have hit 3-month highs.

IG Client Sentiment Shows Mixed Outlook for EUR/USD

Data shows 62.12% of traders are net-long with the ratio of traders long to short at 1.64 to 1. The number of traders net-long is 4.19% higher than yesterday and 0.24% lower from last week, while the number of traders net-short is 2.85% higher than yesterday and 1.75% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.

Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

Source: DailyFX, IG

By Justin McQueen, Strategist, 27 September 2021. DailyFX