The euro climbed as much as 0.6% before trimming some gains to trade just below $1.05 on Monday, as traders processed the results of the German election.
Euro pares some gains
The conservative CDU/CSU bloc secured 28.6% of the vote, followed by the far-right Alternative for Germany (AfD) with 20.8% and the center-left SPD at 16.4%, which was broadly in line with market expectations. CDU leader Friedrich Merz will need at least one coalition partner to form a parliamentary majority, with a potential deal with the SPD being seen as the most likely option. However, the coalition talks could be lengthy and complex, given the political dynamics and the need for compromises on key issues.
German elections impact
Meanwhile, the far-right AfD and the Left Party together secured around a third of the seats, which gives them considerable influence in the new parliament, enough to block critical legislation. This fragmented political landscape creates significant challenges for the incoming government, particularly when it comes to advancing pro-growth policies, fiscal stimulus, or any reforms to the debt brake that would allow for increased public spending. The political uncertainty surrounding coalition negotiations and the possibility of prolonged deadlock could weigh on investor sentiment in the short term, as it may delay necessary policy responses to support economic recovery.
Uncertainty on the horizon
Moreover, the balance of power in the new parliament may lead to heightened political fragmentation, complicating the government's ability to make decisive policy changes. Investors will be closely watching any signs of negotiation breakthroughs or further delays in forming a stable government, as well as how the political landscape could impact Germany's fiscal policies, economic outlook, and its role within the broader EU. The euro’s movement may continue to reflect these uncertainties, with traders staying alert to any developments that could shift market expectations.
