Forex Crunch German Elections and the Euro

Posted: 25 Sep 2009 02:00 AM PDT

General elections are held in Germany on Sunday, September 27th. Learning from the past, EUR/USD may move strongly at the beginning of the week, and even start with a weekend gap.

Germany’s general elections are held on Sunday, September 27th. The main contestants are the incumbent chancellor Angela Merkel of the center-right CDU party, and her opponent Frank-Walter Steinmeier of the center-left SPD party, which is also her foreign minister.

The grand coalition between the central left and right parties is considered successful, but both parties would rather have their own coalition. If the results of 2005 are repeated and the new coalition is similar to the old coalition, this will be positive for the Euro.

But if the outcome is different, and the political horizon is unclear, EUR/USD will weaken.

2005 Scenario

The last general elections were around the same date 4 years ago, on September 18th 2005. Then, the results were quite confusing: Both central parties lost seats in the parliament and both couldn’t form a coalition with their “natural” partners.

The political stalemate hurt EUR/USD immediately after the elections. It made a nice fall when trade resumed on Monday. The political stalemate took a long time to unwind. A new government was formed only two months later.

Japanese Elections

We don’t need to travel so far in the past to see the impact of elections on currencies. The general elections in Japan brought the expected result: a landslide and historic victory for the opposition DPJ over the long time ruling LDP.

Also in Japan, elections were held on Sunday and the Japanese Yen soared on Monday. USD/JPY is still affected by the results, weeks later.

So, since the outcome of the elections is unknown before the weekend, positions on EUR/USD should be handled with care.