Germany: EUR/USD to race higher only on a major election surprise – Danske Bank

German election is shaping up to be a close call, with several 3-way coalitions in reach of a majority. Strategists at Danske Bank see an equally likely probability for a ‘Jamaica’ coalition (40%) led by the CDU/CSU and a ‘traffic light’ coalition (40%) led by the SPD. A ‘red-red-green’ coalition (20%) leaves the biggest disruption potential. Only a major election surprise has the potential to trigger significant market moves in their view.

German election is shaping up to be a tight race 

“We see an equally likely probability for a ‘Jamaica’ coalition (40%) led by the CDU/CSU and a ‘traffic light’ coalition (40%) led by the SPD. Both centrist coalitions should not ‘rock the boat’ in terms of policies as left-wing or conservative tendencies will likely be moderated either by the Greens or the Liberal FDP.”

“Difficult and lengthy coalition negotiations will likely ensue after the election and we would be surprised to see a new German government in place before the end of the year.” 

“While both a ‘Jamaica’ or ‘traffic light’ coalition would not lead to dramatic policy changes in our view, markets will keep a close eye in the remaining weeks on the chances of a left-wing government taking power, as this constitutes the biggest disruption potential.”

“Only a major election surprise has the potential to trigger significant market moves. There is room for such a potential surprise to trigger a rally in EUR/USD, especially now where market participants seem to have shifted their attention towards the dollar. If so, focus would be on the degree of EU collaboration for increased spending (aka ‘fiscal regime shift’) as well as the actual details of the Green spending plans.”