Fundamental Analysis

Euro Dips After German Election

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The euro has started the week with losses, as EUR/USD has dropped below the 1.19 level. Currently, EUR/USD is trading at 1.1885, down 0.52% on the day. Germany went to the polls on Sunday, and Angela Merkel won a fourth term as president. On the release front, German Ifo Business Climate slowed to 115.2, short of the estimate of 116.0 points. Later in the day, ECB President Mario Draghi testifies before the European Parliament Economic and Monetary Affairs Committee. There are no US economic releases, but we’ll hear from three FOMC members – William Dudley, Charles Evans and Neel Kashkari. On Tuesday, the US releases CB Consumer Confidence and New Home Sales. Federal Chair Janet Yellen will speak at an event in Cleveland.

Angela Merkel easily won the German election on Sunday, but will have to cobble together a coalition in order to form a government. Merkel’s Christian Democratic Union (CDU) won 33% of the vote, the Social Democrats (SFD) won 20%, while the Alternative for Germany (AFD) took 13% of the vote. The AFD ran on a far-right, anti-immigrant platform, and the party’s surge in support has sent shock waves in Germany and across Europe. Merkel is taking her trademark “carrot” approach to the AFD and its voters, saying she hears their message to the mainstream establishment and will work to make sure that their concerns are heard. The euro lost ground after the election results, and has weakened further on Monday, after a disappointing reading from the German Ifo Business Climate for September. The indicator dropped to a 3-month low, but the reading of 115.2 still indicates strong economic growth in the eurozone’s largest economy.

The eurozone is enjoying solid growth, with much of the credit going to Germany, the largest and strongest economy in the bloc. The German economy continues to perform well, with low unemployment, strong consumer demand, and a robust export sector. Institutional investors and analysts like what they see, as last week’s German ZEW Economic Sentiment Sentiment rebounded in September and climbed to 17.3 points, following a disappointing reading in August of 10.0 points. The ZEW report was very positive, noting that German growth in the second quarter remained strong, and both the public and private sectors were marked by increased investment. The report added that the stronger euro had not had a negative impact on the German economy, and the upcoming German election had not caused any uncertainty in the markets.

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