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.
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.
- German Elections: Europe will move on with Merkel behind the wheel
- Germany: Merkel seeking her fourth term - Rabobank
- German election: Limited impact on SSAs and covered bonds - HSBC
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.
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