EUR: German elections has provided a reality check on EZ political risks - ING

The EUR fallout from the German elections has been more significant than most may have anticipated – though understandable when considering the underlying implications, explains Viraj Patel, Research Analyst at ING.

Key Quotes

“Not only does it risk slowing down any Merkel-Macron attempts for a deeper EZ integration, we suspect the rise of the populist AFD party is likely to provide a reality check on the way investors view EZ political risks. Indeed, since the French elections, we’ve noted that the EUR may have been playing the role of a ‘political haven’ – especially when taking stock of the political risks plaguing the likes of other G4 currencies (namely USD and GBP). However, the return of the ‘populist voter’ in a European election is a reminder that political risks haven't completely abated for the euro – especially with the spectre of the possibly more contentious Italian elections looming in early 2018. This could well be a concern for medium-term real money investors (eg, reserve managers), while any waning EZ recovery sentiment could see a pause in the cyclical EUR upswing. While we see little fundamental reasons for EUR/USD moving lower, we note the pair risks breaking out of a head-and-shoulders pattern (support 1.1835/40) that might see a broader correction towards 1.16. A dovish Yellen may help to avoid this scenario.”