EUR/USD Could Gap Lower On The German Election Upset
The next German parliament will be fractured, very fractured and this means long and difficult coalition negotiations and a period of uncertainty.
Angela Merkel’s CDU/CSU bloc came out first, but with a poor outcome: around 33% of the vote against around 40% projected. The other mainstream party, the SPD, was defeated as expected, but at their worst outcome: 20-21%.
Things get worse from here: the SPD was quick to say they will go into opposition. Many market participants preferred a continuation of the current and stable grand coalition. Merkel previously had a coalition with the pro-business FDP. However, together they have only 42-43% of the votes, not enough for a coalition.
This only leaves a Jamaica coalition on the cards: CDU+FDP and the Greens. But, the Greens and the FDP have very different views, especially on Europe.
The exit polls were published hours before markets open in Asia. Assuming these exit polls are more or less correct, the euro could certainly open lower.
EUR/USD closed the week at 1.947, sticking to the well-known ranges. An easy victory for Merkel was priced in, but not this kind of victory.
The euro’s fall could meet support at 1.1870, closely followed by 1.1840. The next significant line of support awaits at 1.1712. Resistance is at 1.20 and 1.21.
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