The euro is fluctuating significantly in response to the results of the German parliamentary elections, uncertain about how to react. Had a sixth party emerged, missing the 5% threshold by just a fraction, the EUR/USD might have plummeted dramatically. Investors are now considering whether Friedrich Merz can swiftly form a coalition. The fact that the leader of the Christian Democratic Union is already in talks with the Social Democrats about increasing defense spending by €200 billion is viewed positively by supporters of the euro.

Bundesbank President Joachim Nagel has stated that there is a clear government mandate and viable coalition options. Germany needs an effective government, and it needs one quickly. Simultaneously, the decline in the ratio of German bond yields to swaps has reached a record low, indicating a high likelihood of an increase in debt issuance.

Dynamics of the German Bond and Swap Rates Ratio

Berlin is clearly determined to increase spending in order to avoid a third consecutive contraction in GDP. In 2023 and 2024, the economy experienced negative growth, which resulted in Olaf Scholz's Social Democrats losing power.

Meanwhile, traders are speculating in the futures market that the European Central Bank will lower borrowing costs to not the expected 2%, but instead to 1%. This would involve a monetary expansion at each of the remaining seven Governing Council meetings in 2025. While such low rates currently seem unlikely, the future remains uncertain.

Dynamics of the Expected Scale of the ECB Monetary Expansion

There are many uncertainties in Europe, but the United States may provide some insight. Consider Donald Trump's tariffs and delays in their implementation, which are negatively impacting the US dollar, along with deteriorating macroeconomic indicators in the US. If we see more troubling signs from retail sales, business activity, and consumer confidence, it could signal a shift away from American exceptionalism. In that case, the potential for parity between the euro and the US dollar could become more distant.

Much will depend on which foot Donald Trump gets out of bed on. He has claimed that 25% tariffs on imports from Mexico and Canada will be implemented as scheduled. However, the U.S. administration is pressuring Mexico to impose import duties on goods from China. If Mexico agrees to this, it may lead to another extension of the timeline. This situation could further convince investors that the threats from the 47th U.S. President are merely part of a negotiating strategy and may exert downward pressure on the dollar.

On the daily chart of EUR/USD, the "bulls" are attempting to push back toward the upper boundary of the fair value range, which lies between 1.028 and 1.050. Previous attempts have not yielded results, but the bulls remain persistent. If there is a successful test of resistance, it may be possible to establish long positions. Conversely, if the currency pair falls below 1.045, it may make sense to revisit selling the primary currency pair.