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How Might Germany's Election Affect The Pound to Euro Exchange Rate?

Image credit: William Lepretre.

by Peter Lavelle

In this article I'll tell you how Germany's federal election at the weekend may affect the pound to euro exchange rate.

This weekend, Germany held its federal election, in which chancellor Angela Merkel's Christian Democratic Union (CDU) party underperformed. To be specific, the CDU won just 33.7% of the vote, its worst result since 1949. Meanwhile, far-right extremist party Alternative Fuer Deutschland (AfD) won 13.4% of the vote, and will now enter the Bundestag, as the 3rd biggest party.

As a result of this vote, the pound to euro interbank exchange rate has hit a 10-week high, its highest since July 14th, at 1.1431. So how might Germany's election affect the exchange rate from hereon?

1. The euro may fall, as Mrs. Merkel struggles to form a coalition government.

First, sterling could continue to rise versus the euro, as Mrs. Merkel struggles to form a new coalition government, given the German election results. In particular, the Chancellor's coalition partners, the Social Democrats, have ruled out forming a new 'Grand Coalition' government this time round.

Given this, Mrs. Merkel's only option is to negotiate with the smaller First Democratic Party (FDP) and the Greens, to form a majority in the Bundestag. These negotiations will take time, bringing doubt to Germany's political and economic outlook, and thus hurting the euro!

2. The euro could weaken, as the extremist AfD makes gains.

What's more, the pound to euro interbank exchange rate could also exceed this 10-week high, as the far-right AfD party has made solid gains at Germany's federal election. In particular, the AfD's success has drawn attention to the fact that populism in Europe is still alive, following Marine Le Pen's defeat at France's presidential election in May.

In addition, there's also the fact that the AfD is the 1st party to enter Germany's Bundestag with neo-Nazis and racists since the end of WWII. This points to growing political instability in Germany, and could drag down the common currency!

3. The euro might lose out, as Emmanuel Macron's EU reforms flounder.

Lastly, the exchange rate may rise further, because Germany's election results make it less likely that French president Emmanuel Macron will reform the EU, as he aims for. To be specific, just this week Mr. Macron spelt out an ambitious program to reform the EU, including an EU finance ministry and fiscal transfers between countries.

Yet, if Angela Merkel is busy keeping 2 coalition partners happy, as well as keeping a lid on the extreme right in Germany's Bundestag, she'll have less wiggle room to reform the EU, with Mr. Macron. In turn, this could boost the pound versus the euro!

With all this in mind, the pound to euro interbank exchange rate could rise further, as a result of Germany's election this weekend!

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or email peter.lavelle@purefx.co.uk.

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