Euro little-changed ahead of Germany's general election

The euro hovered just below $1.05 as investors remained cautious ahead of Germany’s general election on Sunday and digested the latest PMI data from Europe's largest economies.

Euro little-changed ahead of Germany's general election

Polls indicate that the conservative CDU/CSU bloc, led by Friedrich Merz, is on track to secure the most votes but will likely require coalition partners to form a government. The election comes at a time of economic stagnation in Germany, with weak industrial production and persistent inflation dampening the outlook. Markets are closely watching the election outcome for potential shifts in fiscal policy, particularly regarding energy subsidies, EU-wide economic coordination, and government spending priorities.

Continued fragility in the Eurozone recovery

On the economic front, the latest data signaled continued fragility in the Eurozone’s recovery. Private sector activity showed little to no growth in February, with the composite PMI holding steady at 50.2, missing expectations of 50.5. While services activity managed to expand slightly, manufacturing remained weak, highlighting ongoing struggles in European industry amid subdued global demand and high borrowing costs. Business sentiment also softened as firms pointed to lingering geopolitical uncertainty and concerns over trade disruptions.

Potential impact of escalating geopolitical tensions

Traders also weighed the potential impact of escalating geopolitical tensions. The US signaled plans to scale back its support for Ukraine while engaging in negotiations with Russia, notably excluding both Ukraine and Europe from discussions. This raised fresh concerns about European security and energy supply stability, with analysts warning that prolonged geopolitical uncertainty could weigh on investor confidence. Meanwhile, trade risks are mounting after US President Donald Trump indicated he is likely to impose a 25% tariff on automobile, semiconductor, and pharmaceutical imports starting April 2. Such a move would have significant implications for major European exporters, particularly Germany’s automotive sector, which heavily relies on US demand. The prospect of new trade barriers further pressured the euro, as investors assessed the potential economic fallout and the likelihood of retaliatory measures from the European Union. Looking ahead, markets will remain focused on the German election outcome, future ECB policy signals, and developments in US trade policy, all of which could shape the euro's trajectory in the coming weeks.