EUR: Optimistic reaction to German vote - ING

The German election results were broadly in line with opinion polls. The CDU/CSU is the leading party with 29%, followed by the far-right AfD at 21% and the SPD at 16%. While the CDU/CSU fared slightly worse than expected and the AfD's growing popularity was confirmed by the vote, incoming chancellor Friedrich Merz will benefit from two parties (the left-wing populist BSW and centre-right FDP) falling short of the 5% threshold to enter the parliament, meaning a CDU/CSU-SPD coalition would have a parliamentary majority, ING's FX analysts Francesco Pesole notes.

EUR to return below 1.04 over the next four weeks

"The euro has reacted positively to the result as the rise of the AfD was largely in line with expectations and a two-party government is deemed more stable given the unsuccessful three-party experience of the outgoing government."

"The period of coalition talks starts now and we could see some residual euro sensitivity to the topic, especially for everything concerning the debt rule. That said, we see a high chance German politics will move back to being a small secondary factor for FX and EUR/USD will be driven primarily by US tariffs and US-Russia-Ukraine peace talks."

"We remain reluctant to chase EUR/USD beyond 1.050 as a general rule, given the looming risk of US tariffs on the EU and the European Central Bank's resolutely dovish stance. Ultimately, we expect to see a return below 1.04 over the next four weeks."