EURUSD: Merkel and Summers relief for EUR could be short lived

The other news this weekend apart from Larry Summers’ withdrawal from the Fed race was a major boost for Angela Merkel heading into the last week of campaigning before Sunday’s Federal elections in Germany.

Merkel’s key ally, the Christian Social Union, won the Bavarian state elections at the weekend. As we mentioned last week, Bavaria is an important state – it is the home of major industry including Siemens and BMW and has an enviable 3.9% unemployment rate. This news propelled the Dax to fresh record highs above 8,600, and it is managing to hold onto these gains as we progress through the European session.

There was a double whammy of good news for EURUSD – 1, the German election results and 2, news that Larry Summers was out of the race to be the next Fed chairman, which caused the dollar to tank. EURUSD jumped to a high of 1.3380, but has since retreated back to 1.3350; however pullbacks so far have been shallow.

Fundamental Risks could thwart any attempt for EURUSD to find a trend

Aside from the Fed meeting this week, the key risk for the EUR may still be the German elections. Although the Bavaria result is good news Merkel is not out of the woods yet. Merkel’s centre-right coalition partners, the Free Democrats (FDP) are having a torrid time in the polls. They need more than 5% of the vote next Sunday to propel Merkel to victory. Right now they are only managing to attract 3%. If the FDP don’t make 5% then Merkel may have to establish a grand coalition with the opposition, the Social Democrats. This is a key risk for next week as a grand coalition is the least attractive outcome from the German elections, back in 2009 a grand coalition proved to be unworkable.

Germany has underpinned Eurozone stability since the onset of the sovereign debt crisis in 2009, thus, the outcome of these elections is crucial for the stability of the EUR going forward.

Market Impact:

Post the Bavaria elections and the boost to sentiment from the Larry Summers news, the Dax jumped to a record high above 8,600. But any adverse outcome from the German election could weigh heavily on the Dax after it has reached these lofty levels.

EURUSD made another stab at 1.3395 after the double whammy of good news; however it got thwarted ahead of 1.34- the highest level since February - once again. This is a tough level of resistance and the market may not be willing to push it above here ahead of this week’s key fundamental risks. In the short term, the pullback so far in EURUSD has been shallow, and it is finding a short term base around 1.3345. So where may this cross go next? Here are two scenarios that could play out in the next few days:

1, A dovish Fed and a win for Merkel and her coalition partner: this could be the best news for the EUR, above 1.3400 opens the way to 1.3455 – a cluster of monthly moving averages and back towards 1.35.

2, A less dovish Fed and a Grand Coalition disappointment for Merkel: This could weigh on EUR, below 1.3345 – the 200-week moving average, the short term bias is lower. Key support lies at 1.3280 – Kijun line on the cloud – and then 1.3240-45 – Tenkan line on the cloud and the 50-day sma. However, depending on how committed the Fed is to tapering, we could see back to 1.30 if it looks like the FOMC is taking its first steps towards tightening monetary policy.

Источник: Forex.com

16.09.2013