After a weaker-than-expected result from the German elections– the worst for the Christian Democratic Union in 70 years – the euro dipped lower. However, the declines will likely be capped and the euro is forecasted to rebound.
Increased demand for anti-immigration Alternative for Germany party, the first time the nationalist party has entered parliament since the Second World War, left Angela Merkel with less power.
Still, Ms Merkel won chancellor for the fourth term, however will be entering into a far more complex coalition than ever before with the Social Democratic Party of Germany and the Alternative for Germany party throwing a spanner into Merkel’s government.
The euro decreased by 0.56% against the dollar in the wake of the decision, trading at $1.1877. After initially shrugging off the election results, equities are beginning to slide. Germany’s DAX 30 is up 0.04%, however France’s CAC 40 is 0.18% weaker.
The early selling of the euro may be a knee-jerk reaction, as the European Central Bank is unlikely to change monetary policy forecasts in reaction to the results. Instead, after months of inching higher, investors have taken this opportunity to take-profits at the highs.
However, the result fits into a wider threat in Europe. Nationalism and populism are spreading across the bloc, even affecting the strongest economies – Germany. The eurozone’s real obstacle will be to quench these prominent forces and with that, the euro will flourish.
The Alternative for Germany party had vowed to fight the ‘invasion of foreigners’ capitalising on voters who disagreed with Merkel’s decision to take in undocumented migrants and refugees.
However, a deal has not yet been made. Although Merkel’s Christian Democratic Union won the majority, it did not win enough votes to govern alone. The CDU will have to form a coalition, finding four parties to form a government, which will take months of negotiations. All political parties ruled out a coalition with the AfD.