Euro declines after German election, and it doesn’t stop there

The victory of Angela Merkel as the German Chancellor for her fourth term on September 25 has depressed the European currency. This happened due to expectations that she will form a governing coalition. The common currency rallied for two days after Merkel’s Social Democratic Party didn’t participate with her Christian Democratic Union.

This urged her to negotiate with the Green Party and the Free Democrat Party, which is pro-business. The movement is forecasted to last for months as forming a particular kind of government is challenging.

Several currency analysts are expecting the euro to notch the $1.20 handle following its 13 percent advance for the month. The process of government formation is widely believed to influence the movement of the common currency.

The euro was rapidly placed in the negative territory the moment when Germany’s election suggested that it would support the far-right party. The currency dropped to its weakest in a month by 0.9 percent to settle at $1.1906 and was perceived to test support about $1.1860 as it picked liquidity throughout the trade. The pound sterling didn’t also do well on the day as it fell more than 0.3 percent at $1.3466.

Valentin Marinov, a strategist at Credit Agricole SA, said that all currencies are less liquid and the movement of prices may be the beginning of a much significant correction in the European currencies crosses. He added that any further decline of euro could linger a buying opportunity before the European Central Bank (ECB) meeting and the release of inflation figures next month.

Aftermath German Elections 

The euro continues to fall towards $1.8000 as investors are trimming their long positions. The common currency had a negative reaction to the German election, but it currently looks like to become a broader hit on the bulls of euro. Worries on possibilities that the ECB may not shed some light regarding its monetary policy tapering has been weighing down the euro.

According to forex traders in London and Europe, investors that don’t have sufficient exposure to the euro already saw the currency’s value by unwinding their longs, given the latest tilt from the U.S. Federal Reserve.

Euro’s future

There are on-going concerns if whether euro can re-test on the $1.20 level, given that it incapability to stage a rally amidst geopolitical uncertainties, this includes the recent feud between North Korea and the United States.

However, the separation of price movements amid options and the spot market are showing that euro’s headwinds are only temporary as the currency is still trading above par.

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