German elections EURUSD mildly lower as coalition talks begin

In line with the polls the SPD led by Olaf Scholz won the largest number of votes in the German elections. The SPD won 25.7% of the votes, whilst the CDU/CSU came a close second with 24.1%, the worst performance by the Conservatives in recent history.

The smaller parties, the Green party and the FDP won 14.8% and 11.5% respectively making it a successful night for the minorities.

Coalition talks

The election results pave the way for coalition talks. There are several outcomes which could come about as a result of coalition talks. Olaf Scholz’s centre left social democrats will initially look to seek a coalition with the Greens and the FDP, in the so-called traffic light coalition.

However, the CDU/CSU have also said that they plan to try to form a government with the FDP and the Greens. This has been called the Jamaican coalition. So although the SPD’s narrowly won the election, the FDP and the Greens could actually decide who will lead the next coalition government in Germany.

Coalition talks in 2017 dragged on for six months, many will be hoping that these talks will be quicker given the challenges that lie ahead. Whilst there are other coalition options, the traffic light or the Jamaican coalition are considered a continuation of the status quo in terms of fiscal and EU policies. There could be a slight shift in a policy, particularly in a greener direction but broadly speaking the result indicates continuity.

Market reaction

So far, the market’s reaction has been relatively muted. There have been no surprises. The prospect of at three-way coalition prevents market unfriendly scenarios. The DAX has pushed higher and trades over 15600 thanks in part to likelihood of the business friendly FDP being included in the coalition. See two trades to watch.

Meanwhile the Euro has come under mild pressure, weighed down by the limbo as talks take place.

Learn more about the Euro

Where next for the EUR/USD?

EUR/USD trades below its descending trendline dating back to early September. The RSI points to further losses whilst it remains out of oversold territory. Immediate support can be seen at 1.1680 last week’s low, ahead of 1.1665 the August low. A break below here could expose 1.16 a level last seen in November 2020. On the flip side, a move over 1.1750 the falling trendline and horizontal resistance could negate the near term down trend help the pair towards 1.1790 the 50 sma.

How to trade with City Index

Follow these easy steps to start trading with City Index today:

Open a City Index account, or log-in if you’re already a customer.
Search for the market you want to trade in our award-winning platform.
Choose your position and size, and your stop and limit levels
Place the trade.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.