The Dax in focus as Merkel attempts to get merry in Bavaria

It’s not just the FOMC meeting that is taking place next week; German Federal elections also take place on Sunday 22nd September. This weekend will be a key test for Merkel as an important state election takes place in Bavaria. Apparently election campaigns in Bavaria are all about performing well in beer halls and it looks like Merkel’s key coalition partner, the Christian Social Union party, can have a scoop or two to celebrate as the latest polls expect it to secure an important win over the Social Democrat opposition.

Bavaria is considered a key litmus test ahead of next week’s Federal elections and it is an important state: it has 9.5 million voters, is home to BMW and Siemens and it has an enviable unemployment rate at just 3.9%. If the CSU can secure victory here it could suggest that there is little appetite for political change in the country, which would give Merkel important momentum heading into the last week of campaigning.

So what does this mean for markets?

Markets dislike uncertainty so a win for the CSU and thus a seal of approval for Merkel, may give financial markets a boost. This is important for the Eurozone as Germany has spear headed efforts to deal with the Eurozone’s sovereign crisis. Indeed, Merkel’s determination to keep Greece in the Eurozone after elections last year can be considered a turning point in the crisis, when the markets started to believe that the Eurozone would not fall apart. Without her at the helm of the currency bloc investors may start to doubt the survival of the union once again.

We think that German election risk may have a bigger impact on the Dax rather than the euro. EURUSD is trading in a tight range and we think that this pair will be driven by dollar factors and the outcome of the FOMC meeting in the coming days. In contrast a win for the CSU could trigger a relief rally in the Dax early next week.

Technical outlook:

The Dax has traded higher in recent days although it is continues to struggle at 8,500, a key resistance zone and a record high that was reached back in June. So far pullbacks have been shallow; suggesting that momentum remains to the upside and the uptrend of 2013 is still in place.

The Bavarian elections could focus minds that a win for Merkel next Sunday is within reach, which may sustain positive sentiment for the Dax in the coming days. However, rather than dive straight in post the Bavarian result, we would urge caution as the FOMC meeting is a key risk event for global equity markets. The outcome of the meeting and potential tapering by the FOMC, could weigh on the Dax, although we think that any weakness could be pounced on by the markets in the lead up to Federal elections next weekend.

Key support lies at 8,296 – the 50-day moving average, and then 8,222 – the top of the daily cloud. Any move back to these levels could be met with some buying pressure.

Source: Forex.com

13.09.2013