The German Election is here
With the Federal Election in Germany fast approaching on September 24th it is time to consider the effect of this event on financial markets.
So far it seems like markets are pricing another mandate for Angela Merkel, fourth one to be exact, with polls suggesting similar outcome with Chancellor Merkel’s Chirstian Democratic Union holding the lead before its main counterpart – Germany’s Social Democratic Party led by Martin Schulz.
Angela Merkel has led Germany through a world financial crisis that saw Germany as one the most stable economies. She also faced one of the greatest immigration crisis of our time while seeing several US presidents change. Germany’s unemployment rate dropped to record lows during her mandate while wages remained stable and even showed growth at a time when other countries around Europe suffered increasing financial instability.
It would be rather optimistic however to consider an easy win for Merkel’s CDU after a year of rising populism and election campaigns shaking the EU’s stability. After UK’s decision to leave the European Union and a win by Donald Trump in the US Presidential Election markets are making sure they are not caught by surprise on this one.
Another mandate for Angela Merkel’s Christian Democratic Union will be taken by investors as a sign of positive continuation and we may see both the single currency and the DAX advancing higher after already having a great year so far. On the other hand a new ruling party in Germany may send a message of uncertainty across the markets and we may see investors withdrawing from the EUR and German assets to seek investments in other regions and safe-heaven assets until political agenda in Germany becomes clear.
Here is how we can expect EURUSD and the DAX to react to the upcoming election:
The Christian Democratic Union wins the election and Angela Merkel goes into her fourth mandate to serve as Germany’s Chancellor with Wolfgang Schaeuble most likely continuing to serve as Germany’s finance minister. The CDU will need to form a coalition in order to form a government but markets will most likely be happy with the DAX registering a fresh record high above 13000 with potential of reaching 14000 until the end of 2017. Filled with optimism EUR bulls take charge and push EURUSD to a fresh high above 1.2300 mark where price may pause under long term descending tredline. If Bears do not come in around that price area we may see the EURUSD breaking above the descending long term resistance taking the pair higher on its path towards 1.4000 in the months after the election.
Merkel’s CDU slips behind and allows its main counterpart, Schulz’ SDP, to win the election and receive a mandate to form a coalition government. At this point we may see the Single Currency and European Equities going into retracements as many investors hedge against uncertainty in Europe’s most significant economy. The DAX may break its ascending channel support line and head towards previous resistance/support areas around 11000 with EURUSD falling towards previous resistance/support around 1.1500. If selling accelerates we may see EURUSD fall towards previous lows around 1.0500 reaching closer to Euro-US Dollar parity.
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