The recent German federal election resulted in a shift towards the right, with the conservative CDU/CSU emerging as the winners alongside gains made by the far-right AfD. However, the CDU did not secure a majority and will require a coalition, likely involving the outgoing Social-Democrats and smaller parties.
Coalition talks are expected to take several weeks. The EURUSD briefly rallied to the low 1.05 range but faced resistance around 1.0530, which restricted further gains and maintained a flat near-term outlook for the currency.
With Germany’s leadership structure now in flux, the euro’s reaction has been measured. The brief rally to 1.05 against the dollar showed some optimism, but resistance at 1.0530 kept upward momentum in check. Markets are watching how coalition negotiations unfold, as any prolonged uncertainty could stoke volatility.
For now, the currency pair remains rangebound, and traders seem to be waiting for further direction. If coalition talks drag on or if any unexpected hurdles emerge, the euro may struggle to hold its recent gains. Alternatively, a quicker-than-expected agreement could provide a short-term lift.
Beyond currency moves, rate expectations have also been steady. The European Central Bank has not suggested any sudden shifts in policy, and with inflation proving stickier than anticipated, there is little room for surprise rate cuts in the near future. Given that, interest rate differentials between the euro and the dollar remain an important focus.
In terms of equity markets, we noticed some hesitation in German stocks. Investors appear wary of the incoming government’s fiscal stance and policy outlook. Should coalition talks lead to proposals favouring increased spending, debt issuance concerns may weigh on bond markets.
Across the Atlantic, US data remains a key factor. Inflation figures due next week could steer market sentiment, impacting expectations on Federal Reserve policy. If inflation readings come in above estimates, Treasury yields may rise further, placing renewed pressure on riskier assets, including European equities.
As traders gauge the next steps for rates, bonds, and currencies, technical levels remain decisive. Support for EURUSD appears in the 1.0450 region, while breaking above recent highs near 1.0530 could provide an opportunity for further upside. With multiple macroeconomic events lined up, staying attentive to signals from policymakers and central banks is essential.
