Euro Flat as Tight German Election Promises Slow Progress on Forming New Govt

The dollar opened flat against the euro on Monday after a narrow win for the center-left in Germany’s parliamentary elections.

The center-left Social Democratic Party took the biggest share of the vote, with preliminary estimates showing it on 26%, two percentage points ahead of the center-right Christian Democratic bloc. As such, the party of the retiring Angela Merkel looks likely to go into opposition for the first time in 16 years.

Any fear of radical change under a new government was tempered by the poor performance of the far left Linke party, which all but ruled out any chance of it joining the new government.

“The tail risk of significant tax hikes, a denser web of regulations, reform reversals and a tight lid on housing rents has evaporated,” said Holger Schmieding, chief economist at Berenberg Bank in Berlin.

However, the tightness of the result means that the next government will need three parties to command a majority in the Bundestag. Both of the third- and fourth-largest parties, the Greens and the pro-business Free Democrats, have signaled they will work with either of the bigger parties. That suggests that negotiations on coalition-building are likely to be complex and time-consuming.

By 3 AM ET (0700 GMT), the euro was at $1.1711, unchanged from late Friday in Europe. It was also effectively unchanged against sterling at 0.8561, failing to gain ground despite the increasing signs of crisis coming out of the U.K. economy. Well over half the gas stations across the country were reported to be without fuel at the weekend after reports of shortages triggered a nationwide wave of panic-buying. Prime Minister Boris Johnson, having signalled a retreat on allowing EU truck drivers to work in the U.K. on Friday temporarily, was reported earlier as planning to dispatch military drivers to ensure deliveries.

Elsewhere, both the dollar and the euro rose against the Swiss franc as risk aversion receded in response to the deal signaling a slight relaxation of the tensions between the U.S. and China on Friday. Huawei chief financial officer Meng Wanzhou will be released and allowed to return to China, after a compromise deal. Meng had been arrested in Canada nearly three years ago at the request of President Donald Trump’s Justice Department.

USD/CHF rose 0.3% to 0.9271 while EUR/CHF rose 0.3% to 1.0855.

In emerging markets, the Russian ruble hit its highest in nearly a week as crude oil prices continued to rise, while the Turkish lira appeared to find a bottom after sliding dramatically in response to a surprise interest rate cut by the country’s central bank on Thursday. USD/RUB fell 0.2% to 72.5972, while USD/TRY fell 0.1% to 8.8677.

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