EUR/USD: the euro remains firm on the forex despite Merkel but this may not last (UBS)

UBS notes that the forex is not reacting much to Merkel's announcements, but thinks that the EUR/USD could end up retreating in the very near future.

"The situation in Germany could lead Merkel to demand new elections. Merkel also knows that a new election would translate into new losses of seats.

The market has reacted but remains generally complacent, which is surprising. This is an important event and completely changes the situation, not only for Germany, but also for the EU. Without a pro-EU government and finance minister, the Union will also end up in limbo.

Once the situation becomes clearer, we think we may see a significant downward correction of both the EUR/USD and EUR/CHF.

The EUR/USD has tested the support level at 1.1720 which seems still firm at this stage. The threshold could drop later and allow the EUR/USD to slide towards 1.1670/80."