When is the German election and how could it affect EUR/USD?

Eren Sengezer FXStreet

On Sunday, Germans are going to be heading to the polls for a federal election, at which Angela Merkel is going to have a chance to secure her position as chancellor for a historic fourth term. Voting is going to end at 6:00 p.m. local time (4:00 p.m. GMT) and first projections are expected to come in in the next few hours after the polls close. However, the official results are going to be announced on Tuesday.

Key notes:

Support for Angela Merkel's center-right Christian Democratic Union (CDU) was at 36% according to the latest Stern-RTL poll. "Chancellor Angela Merkel has enjoyed a comfortable and stable lead in the polls for several months. It would need a miracle or wrong polling for her not to win the elections. The second place will most likely go Merkel’s primary challenger Martin Schulz and his SPD. The race for number three, however, still remains open," Carsten Brzeski, Chief Economist at ING Bank, wrote in a report this week.

Although it won't be long before we know who came on top at the election, it might take some until a coalition government is formed, especially with Germany's rightwing Alternative für Deutschland party making a late jump in the polls and taking the third place behind CDU and SPD with 12%. The AfD party says, "Germany must reintroduce permanent border controls and the EU's external borders must be completely shut," in its manifesto. Moreover, senior politicians of the party have been vocal about being anti-euro.

Implications for EUR/USD

If AfD receives 12% of the votes as the polls suggest, the party will secure 50 seats in the parliament and their presence in the German government might hurt the shared currency in the near-term. However, the negative effects could fade away quickly as Merkel would have a chance turn to other parties to form a coalition. "...the recent polls show that the Alternative für Deutschland may emerge as the biggest opposition party in the Bundestag. This might reel markets, but keep in mind that they are then expected to suffer the same fate as the Dutch Freedom Party, i.e. political isolation,” Rabobank analysts explain.

On the other hand, if AfD fails to come in third on Sunday, the euro is likely to rise modestly against its peers amid a relief rally. The EUR/USD pair could try to extend its gains above the 1.20 handle, but the pair's overbought-ness and the FOMC's hawkish stance could cap the upside. 1.2090 (Sep. 8 high) could be the next target, and the German election outcome by itself might not be significant enough to carry the pair above that level in the short-term. On the downside, the pair could edge lower towards 1.1860 (Sep. 20 low) and 1.1770 (Aug. 25 low) if there are uncertainties regarding the structure of the coalition after Sunday.

German Elections Preview: What to expect of EUR/USD?

Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

GBP/USD clings to gains above 1.3600 on persistent USD weakness

GBP/USD stays in positive territory well above 1.3600 after retreating slightly from the six-month peak it set above 1.3650 earlier in the day. The US Dollar (USD) stays on the back foot and allows the pair to hold its ground after suffering heavy losses on the US Treasury Department's decision to ramp up long-term bond purchases on Wednesday.

EUR/USD retreats from three-month high, trades below 1.1700

EUR/USD loses its bullish momentum and trades flat on the day below 1.1700 after setting a three-month high earlier in the day. Nevertheless, the pair's downside remains limited as the US Dollar (USD) struggles to gather strength following the US Treasury Department's decision to boost long-term bond purchases.

Gold stays in red below $4,500 despite resurgent USD supply

Gold sticks to modest intraday losses and remains below the $4,500 mark in the European session on Thursday. Despite geopolitical uncertainties, the US Dollar loses ground again, resuming the previous day’s slump to a three-month low.

Bitcoin extends gains above $71,000 as liquidity conditions improve

Bitcoin extends its gains, inching toward $72,000 on Thursday, as crypto markets continue to cheer the US Treasury’s decision to double its debt buyback operations. The move has sharply improved market sentiment and liquidity conditions, helped trigger a short squeeze, and overall provided a positive catalyst for the broader crypto market.

The bond coup

Yesterday was marked by a coup from the US Treasury, which suddenly announced that it will ‘at least double’ the maximum size of its buyback operations for longer-term debt, hoping to ease pressure on long-term yields and borrowing costs. Phoah! The markets reacted heavily to the news. The US 10-year yield fell sharply, while the 30-year yield dropped from its highest levels since 2007.

$20 billion offered, $2 billion taken: Why Treasury doubled its buyback cap

The US Treasury moved off its own calendar on Wednesday, and that is the part worth sitting with. At 12:32 GMT, the department said it would at least double the size of liquidity support buyback operations in the 10-year to 20-year and 20-year to 30-year sectors, lifting the maximum from $2 billion per operation to at least $4 billion, effective September 9 and running to November 4.