EUR Bears to Remain in Control on Possible German Snap Election

EURUSD Analysis and Talking Points

  • Rift over immigration policy could spell the end for Merkel
  • Snap election likely to weigh on the Euro

See our Q2 EUR forecast to learn what will drive the currency through the quarter.

End for Merkel?

If there is one thing that had been made apparent by yesterday’s 2 big figure plunge in the Euro yesterday. Is that nothing lasts forever, whether that’s ECB QE, or Chancellor Merkel’s leadership. Amidst the surprise announcement by the ECB to detail its QE exit and alter its rate guidance, a report had surfaced that the German coalition that took 6 months to form could be on the brink of collapse with Bavarian sister party CSU threatening to break away due to different opinions over immigration policy.

Given the upcoming Bavarian regional election in October, which has the right wing AfD party gaining in the polls, threatening the CSU’s majority, the latter has favoured a tough immigration policy stance. Bavarian Interior Minister Seeehofer had put forward a plan to turn back some refugees at the German border, however, this plan had been refused by Chancellor Merkel, while the SPD party had warned that the coalition would if Merkel had accepted the CSU’s demands.

Last Minute Compromise

Chancellor Merkel will most likely have discussions over the weekend to find a solution and reach a last-minute compromise with the CSU. Although, failure to do so in which the CSU deem any immigration solution as too soft, the Interior Minister could utilise his ministerial powers impose new and tougher immigrations rules. This would not only leave Merkel’s majority vulnerable but risk a split away between the CDU and CSU, raising the threat of a no-confidence vote for Merkel or snap elections, which would likely see the Euro pressured.

EURUSD PRICE CHART: TIME FRAME (November 2016- Jun 2018)

Chart by IG

A test for a break through the June low at 1.1510 has increased, which will likely allow for a run in on 1.1448, which marks the 50% retracement of the rise from 1.0340-1.2556. Resistance is situated at 1.1600-20, with further targets at 1.1650.

Further Unwind of Long EUR Positioning

According to the latest CFTC data heading into June 5th, net Euro longs are still relatively high, valued at $13bln. This suggests that there is further room for a larger unwind of long positions, increasing the risk of a greater fall in the Euro, which could be exacerbated as EURUSD presses for lower levels.

IG Client Positioning Sentiment states that EURUSD may continue to fall. For full client positioning click here

Additional reports on the Euro

EURUSD May Fall Sharply in the Months Ahead

— Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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