Key Points:
- Euro briefly rises 0.6% on German election outcome, approaching $1.05.
- CDU leads with 28.6% of the vote, but coalition-building and parliamentary gridlock pose challenges.
The euro strengthened on Monday, initially gaining 0.6% against the US dollar to briefly approach $1.05, driven by trader relief following Germany’s election outcome. The conservative CDU/CSU alliance emerged victorious, securing 28.6% of the vote. The far-right Alternative for Germany (AfD) followed with 20.8%, while the centre-left SPD took 16.4%, broadly in line with pre-election expectations.
Despite the CDU’s electoral win, significant uncertainty remains as party leader Friedrich Merz faces complex coalition negotiations. Merz must secure at least one coalition partner to form a stable parliamentary majority, with a deal involving the SPD seen as the most probable path. However, these negotiations could be lengthy due to contrasting policies and potential conflicts on spending reforms.
A complicating factor is the strong showing by the far-right AfD and the Left Party, which together hold a third of the seats. This bloc can block key legislative initiatives, particularly those related to spending increases or modifications to Germany’s strict debt brake rules. Analysts caution that this political fragmentation might hinder any immediate fiscal policy reforms aimed at reviving Germany’s stagnant economy.
Technical Analysis
The EUR/USD pair saw a notable decline in mid-February 2025 after a brief uptick, with the MACD shifting from positive to negative momentum, signaling a bearish outlook. The moving averages (5, 10, 30 periods) initially acted as support but later turned into resistance, suggesting a potential trend reversal. The 1.05282 level served as strong resistance, while support near 1.04493 was repeatedly tested, highlighting a key short-term pivot area.
Picture: Bearish momentum builds as EUR/USD tests key support, as seen on the VT Markets app
Looking ahead, the MACD remains below the signal line, indicating that bearish momentum is still in play. A crossover above could suggest a potential reversal or at least a slowdown in the downtrend. Traders should watch for breakouts, as a drop below 1.04493 could trigger further downside, while a move above the recent highs may indicate a recovery attempt.
Markets will closely monitor coalition discussions for signs of compromise or potential deadlock. Traders should expect increased volatility in euro-related currency pairs as the political situation in Europe’s largest economy unfolds.
