According to the latest GMS Poll for the upcoming elections in Germany, Chancellor Merkel's Conservatives were seen winning 37% votes as against Social Democrats' 22%.
Scenarios:
Clear victory by Merkel: This is more of a same kind of situation in Germany and Eurozone. Approving bailout packages will be easy; there will be more room for Eurozone financial integration. The idea of the European monetary fund will gather traction. Finance Minister Wolfgang Schaeuble wants to run fiscal surpluses every year until 2020 and has only vaguely hinted at tax cuts. So there is little scope for fiscal reflation…
Impact on EUR/USD: mildly positive, Focus would shift to the ECB. EUR/USD could rally sharply if Merkel changes her stance following a clear vitory and talks about reflating the economy.
Tight victory by Merkel: Polls suggest Merkel will be short of a parliamentary majority in the Bundestag and will need weeks, if not months, to form a new coalition government.
A small majority for Merkel would make her vulnerable during if there’s a new crisis in the Eurozone.
Impact on EUR: A minor initial sell-off likely. Next move depends on the sound bites - if in support of reflationary policies, EUR would rally.
Schulz win: Schulz has promised to cut taxes for anyone earning less than 60,000 euros - a measure that would benefit nine out of 10 German workers - and to reduce social security contributions for those earning up to 15,000 euros a year. Schulz also wants to spend 30 billion euros more on public investment by 2021. He wants to raise taxes for top earners.
Impact on EUR: An Intraday sell-off could be followed by a sharp rebound and rally to 1.24 handle in the subsequent days, especially if the new Chancellor talks about delivering tax cuts and public spending.
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