Despite the potential shockwaves felt in political circles following the initial round of voting for the next German Chancellor, the foreign exchange market exhibited a remarkable degree of composure, according to Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank.
FX markets unfazed by initial German chancellor setback
“EUR/USD experienced a brief dip immediately following the announcement that Friedrich Merz had failed to secure the necessary votes for a ‘chancellor majority’ in the first ballot, but the currency pair swiftly rebounded. In fact, EUR/USD concluded the trading session at a higher level than where it began. However, it is improbable that this recovery was solely attributable to Merz’s eventual election as Chancellor in the subsequent round of voting,” Nguyen explained. Market participants were likely pricing in the expectation of Merz’s eventual success. This muted reaction suggests that the market had largely anticipated this outcome, or at least, had priced in a higher probability of his eventual success than failure. The Euro’s resilience also reflects broader market sentiment regarding the Eurozone’s economic outlook, which, while facing challenges, remains relatively stable. Key economic indicators released earlier in the week, such as the Purchasing Managers’ Index (PMI) data, pointed to continued, albeit moderate, growth in the manufacturing and service sectors.
“The initial reactions from many observers suggested that Merz was widely expected to secure the chancellorship after a second round of voting. Potential alternative scenarios, such as calling for a new election – a possibility that dissenting members within the coalition ranks must have recognized – would have proven counterproductive for all involved,” Nguyen further elaborated. The prospect of prolonged political uncertainty and instability, which a new election would have entailed, likely served as a deterrent for those considering opposing Merz’s candidacy. Furthermore, the market’s focus remains on broader macroeconomic factors, including the European Central Bank’s (ECB) monetary policy decisions and the ongoing energy crisis, which are perceived as having a more significant impact on the Euro’s trajectory than short-term political developments. Looking ahead, analysts will be closely monitoring the new Chancellor’s policy agenda and its potential implications for the German economy and the Eurozone as a whole. The stability of the governing coalition and its ability to implement key reforms will be crucial factors in shaping market sentiment in the coming months.
