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German Chancellor Angela Merkel is widely expected to coast to victory at this weekend’s election. She is running for her fourth term (12+ years) and her position is so secure that many have looked beyond the election to her next government. Germany won’t be hit by populism as the latest polls show her party, the Christian Democratic Union and its sister party the Christian Social Union have 36-37% support with many exit polls showing last minute voters favoring the incumbent. A victory for Merkel will mean a victory for the euro. Although EUR/USD backed off 1.20 on Friday, investors are anticipating a win. In the very unlikely scenario that she loses, EUR/USD will crash quickly and aggressively and could fall below 1.18. If she wins, it will be under the backdrop of a improving Eurozone economy and a hawkish central bank. Manufacturing and service sector activity accelerated in the month of September according to the PMIs. This has and should continue to limit the slide in EUR/USD and could extend the gains for EUR/JPY and EUR/CHF. Next week’s Eurozone economic reports should continue to support the euro as we are look for improvements in the German IFO, unemployment and inflation reports.

Technically, Friday’s reversal candle is more negative than positive for EUR/USD so we don’t recommend going long the currency unless it drops to 1.1850 which right above the September 14 spike low. As long as EUR/USD hold above 1.18 the uptrend is in tact but if it breaks 1.18, we could see the pair slip as low as 1.16 before finding support so traders need to be careful of overleveraging positions.