Fundamental Euro Forecast: Neutral
- This weekend’s German Federal Election will likely dominate Euro trading at the start of the week ahead.
- However, a stable coalition could take months to build and that means only a limited response can be expected in EUR/USD and the Euro crosses.
Euro sentiment to hang on German election results
The results of Germany’s Federal Election should be known by the start of trading Monday and a limited bounce in EUR/USD is possible, if only because another risk event will have passed by. However, it is hard to see the results having any longer-term impact on the Euro, particularly as a coalition could take months to build and Chancellor Angela Merkel will stay in charge until it has been.
If the opinion polls are to be believed, the left-of-center Social Democratic Party (SPD) will be in the best position to begin coalition building with, perhaps, the Greens and the Free Democratic Party (FDP). At first glance that would be bad for the markets given they might be expected to prefer the more conservative Christian Democratic Union (CDU) led by Merkel before she handed over the reins to the new but less-popular party leader Armin Laschet.
However, an SPD-led coalition is not a frightening prospect. It might relax Germany’s tough stance towards public debt and deficits, and increase public investment, but that would likely lead to higher Bund yields and that’s why the initial reaction could be a bounce rather than a fall in the Euro.
EUR/USD Price Chart, Daily Timeframe (January 4 – September 23, 2021)
Source: IG (You can click on it for a larger image)
Further ahead, though, the only real risk to the Euro would be a failure to form any kind of new Government – though even that would probably be shrugged off as it would just leave Merkel in change as caretaker Chancellor.
Week ahead: Inflation data to dominate
Later in the week, attention will turn to the latest Eurozone economic data – and there will be plenty of that to digest. German and French consumer confidence figures are released Tuesday, followed by Eurozone sentiment numbers Wednesday. More important, though, will be inflation data for France and Germany Thursday and then the Eurozone as a whole Friday.
A tightening of monetary policy by the European Central Bank remains far in the future but strong inflation figures would still be a concern for the ECB and strengthen the Euro if only modestly.
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— Written by Martin Essex, Analyst
Feel free to contact me on Twitter @MartinSEssex