EUR/USD: euro dragged down by German election results

The euro is weaker after the result of the German elections. Coalition talks in Germany could take months, and uncertainty about who will lead Europe's largest economy is weighing on the common currency.

The German federal elections are the main political event in Europe in the second half of 2021. The outcome is a source of uncertainty because of the difficulty in forming a new government. Indeed, the German economy is the largest in the Eurozone and the Euro, the common currency, is affected by the election result.

After 16 years of Merkel's presidency, the market was expecting a close election, and the focus is now on coalition negotiations. Some say they could take weeks or even months. For currency traders, this is important because the euro will struggle to recover until Germany has a functioning government. 

EUR/USD price action continues
The price action of the EUR/USD has been bearish throughout the month. The downtrend, as seen below, began from 1.19, and the pair has continued to form a series of lower lows and lower highs.

More recently, the pair has bounced from the 1.1665 area after the Fed statement and press conference last week. A move below should trigger further weakness, and only a bounce above the FOMC highs of 1.1755 would see the bearish price action reverse.

Overall, the narrow victory of the Social Democrats over Merkel's bloc creates uncertainty for the markets, as both parties (SPD and CDU/CSU) say they should try to form a government. Until a solution is found, the euro remains a sell on the rebounds.