EUR/USD: Germany's new political scope is under the microscope

The euro remained in chronic trouble against the dollar on Monday, as the market tried to gauge what changes, particularly fiscal changes, might be brought about by Germany's political shift after this weekend's elections. Turning the page on Merkel's years in power leaves the currency market with many questions.

Beyond the identity of the new chancellor, it is the political balance within the coalition (likely with 3 main parties) that will be scrutinised. The underlying question for the markets is: what degree of fiscal austerity will result from this new deal? Forex traders are dealing with a historic setback for the liberal-conservatives (CDU), with the social democrats running neck and neck with Angela Merkel's party.

The currency issue on both sides of the Atlantic continues to drive the currency pair.

As a reminder, Federal Reserve members did not agree on Wednesday on a date for tapering, but confirmed that an announcement was close. The consensus expectation is that the decision to start tapering in 2022 will be made official in November.

"However, there are a few touches that are a bit more severe than expected," says Fred Rollin (Strategy Advisor at Pictet AM). "The FOMC members anticipating a rate hike in 2022 are more numerous and expectations for 2023 and 2024 have climbed significantly. The governors voting this year are overwhelmingly doves. The year 2022 will see the arrival of several hawks on the committee. Doves will still have the majority, but it will be closer."

In terms of Friday's stats, the "IFO" business climate index in the Eurozone's largest economy contracted slightly this month to 99.0, almost perfectly in line with expectations. "This is the third consecutive decline. Companies were less satisfied with their current activity. They were also more sceptical about the months ahead. Supply problems for raw materials and intermediate products are holding back the German economy. The manufacturing industry is experiencing a bottleneck", the German institute comments.

A bottleneck that can be found in the US. By pointing out very specific examples in the maritime transport sector, J. Plassard, Mirabaud, tries to answer the question "Until when?"

German carrier Hapag-Lloyd estimated that the disruption would not ease until the first quarter of next year. But managing director Rolf Jansen also warned that this date could be pushed back due to high demand. As for AP Møller-Maersk, less than two weeks ago it raised its full-year forecast for 2021 for the second time in less than 60 days, buoyed by the overheating of the shipping industry, which is resulting in soaring demand and freight prices. It said that given the continued congestion and bottlenecks in supply chains, it now expects the second half of 2021 to be stronger than expected, both in the third quarter and for 2021 as a whole. That said "it is highly likely that the bottleneck will persist beyond the first quarter of 2022."

Right now the pair is trading at $1.1701.

MEDIUM-TERM FORECAST
Given the key chart factors we have mentioned, our medium-term view on the Euro Dollar (EURUSD) is negative.

Our entry point is $1.1697. Our bearish scenario price target is $1.1487. In order to preserve the capital invested, we advise you to place a protective stop at $1.1801.

The expected return on this strategy is 210 pips and the risk of loss is 104 pips.