Synopsis:

MUFG views the early German election date as a potential positive for the EUR outlook. A December 16 confidence motion will likely set an election for February 23, ending Germany’s political uncertainty sooner than anticipated. A potential CDU-led coalition is seen as market-friendly, potentially supporting EUR, but external USD strength and US policy shifts remain influential.

Key Points:

1. Early Election Date: Germany’s power vacuum may end sooner with a scheduled election on February 23, if the government loses the December 16 confidence vote.

2. CDU’s Market-Friendly Appeal: Polls favor the centre-right CDU, which may attract business-friendly policies. A stronger CDU showing in the polls is anticipated to bolster market sentiment for EUR.

3. Challenging Economic Backdrop: The German ZEW Survey of Current Conditions fell to -91.4, its lowest since 2020, reflecting the need for economic revival which a CDU-led government may support.

4. Potential Coalition Scenarios: The CDU/CSU is polling at 32.8%, with a coalition likely to include the SPD, and possibly the Greens or FPD if smaller parties do well. Strong CDU support could facilitate a faster coalition process, easing market concerns.

5. USD and US Policy Impact: While German political clarity is positive for EUR, MUFG highlights the potential overshadowing effect of the USD, especially amid expected Trump-led tariffs that could impact Germany’s economy.

Conclusion:

MUFG expects early German elections to reduce political uncertainty, which may support EUR if the CDU performs well. However, US policies and potential trade tariffs present downside risks, making the EUR’s trajectory dependent on both domestic and external factors.