EUR/USD has struggled to surpass the 1.0500 mark since last month, but recent developments from the German election may shift this trend. Friedrich Merz’s CDU/CSU alliance secured approximately 28.5% of the vote, positioning them to potentially lead the next government.
The far-right AfD party made headlines with around 20.8% of the vote, doubling their previous support. Conversely, current chancellor Olaf Scholz’s SPD faced a steep decline, ending with roughly 16.4%, their worst result in federal elections.
The focus now lies on coalition negotiations. The CDU/CSU will likely exclude a partnership with the AfD and could potentially align with the SPD and the Greens instead, necessitating compromises on key issues like the German debt brake.
The CDU/CSU supports maintaining this fiscal rule, while divisions within the SPD exist regarding calls for reform or temporary suspension. The Greens also advocate for reform to prioritise investment in sustainability and infrastructure, indicating that agreement among parties is essential.
If changes to the debt brake occur, increased investment may strengthen the economy, which is vital given Germany’s recent economic struggles. Despite concerns about rising debt, Germany’s low debt-to-GDP ratio suggests manageable risks in the near term.
In the context of the EUR/USD chart, buyers are optimistic about a breakout above 1.0500. However, immediate resistance exists at the 100-day moving average around 1.0547, requiring further momentum for a sustained upward trend.
Market participants have closely monitored the euro’s struggle to gain ground against the dollar, and recent political shifts in Germany add a fresh layer of complexity. With Friedrich at the helm of the CDU/CSU’s election success, coalition discussions will shape expectations for the common currency. The rejection of any potential agreement with the AfD was expected, but how negotiations progress with Olaf’s SPD and the Greens will be watched carefully.
Budgetary policy is at the heart of these discussions, particularly the question of altering or temporarily relaxing Germany’s constitutionally enshrined debt brake. The CDU/CSU remains firm on preserving fiscal discipline, while Olaf’s party is divided, with some supporting greater flexibility. The Greens, on the other hand, see investment as a priority and are pushing for adjustments that would allow for increased spending without bureaucratic roadblocks. Reaching a compromise will not be straightforward, and failure to do so could lead to either political deadlock or a weaker coalition government.
From a broader perspective, if an agreement enables higher spending, Germany’s growth prospects could improve. This would be particularly welcome given industrial production has remained soft and business sentiment continues to send mixed signals. At the same time, concerns over financial stability are likely overstated; government debt levels remain well within control. This means markets may tolerate looser fiscal policy if it supports long-term investment without excessive borrowing.
For the currency pair, price action reflects the push and pull between these developments and technical barriers. Buying interest has been evident around the 1.0500 level, but progress beyond this psychological threshold has proven elusive. Further resistance sits near 1.0547 at the 100-day moving average—a key hurdle that will need greater conviction to clear. If momentum builds, short positioning could unwind, opening the door for an extension higher.
This remains a delicate moment. Political negotiations will dictate fiscal expectations, which in turn affect broader sentiment towards the euro. Observers should remain attentive to statements from coalition leaders in the coming days and assess how any policy decisions influence growth forecasts. Meanwhile, with resistance nearby, price action requires careful assessment before anticipating a sustained shift in direction.
