The Euro came under pressure on Monday after Angela Merkel’s ruling CDU/CSU party remained the largest party in Germany’s parliament but with its worst result in almost 70 years, taking 33% of the vote.
Currency markets worried by shift in German politics
Forming a coalition is not unusual in German politics. But these election results mean that Angela Merkel now faces some difficult choices as she tries to put together an effective governing coalition.
Her previous coalition partners, the Social Democratic Party (SPD), have ruled out continuing a partnership after suffering their worst election result since 1949. Instead, it seems likely that they assume the role of leader of the opposition.
It is expected that Merkel will now enter into protracted coalition talks with the Greens and Free Democrats, a so-called “Jamaica coalition”. However, investors may be unsettled by this possibility, as the Free Democrats are opposed to deeper financial integration in the Eurozone. There are a number of differences between the three parties, so reaching a deal could take some time.
Markets may also be concerned by the surge of support for the far-right anti-immigration party, Alternative for Germany (AfD), who are now the third largest party in the parliament with 13% of the vote. They will become the first nationalist party to enter the German parliament in over five decades.
Pound rises against the Euro
The Euro fell against a range of currencies on Monday as markets digested the election results. This helped the Pound to recoup some of the losses it experienced after Prime Minister Theresa May’s Brexit speech on Friday disappointed investors by providing less detail than they had expected.
However, it is unclear how long this rebound for Sterling will last as the currency markets turn their attention to the fourth round of Brexit talks, which are taking place this week. A frustration with a lack of progress caused the Pound to weaken at the end of the third round of talks in August and it is possible the negotiations could cause further volatility.
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