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The euro and the European equity futures are in the green this Monday morning on relief that the German elections didn’t bring major surprises. Merz’ CDU/CSU won the election with around 28.5% of the votes – a good result for the center right though slightly weaker-than-expected, Olaf Scholz’ SPD gained around 16% of support – as expected, while the AfD amassed 20% of the votes. The kneejerk reaction is a swift rebound of the euro and the equity futures on hope of higher spending by the new German government would tackle the economic weakness of past years. The EURUSD jumped past the 1.05 in the early hours of trading in Asia and could see a continued support above this psychological mark, the German DAX futures jumped more than 1% and the Eurostoxx futures are also positive at the time of writing. Trend and momentum indicators are positive for the European stocks that have been performing beautifully since the start of this year on the convergence trade, also supported by encouraging earnings, a more supportive European Central Bank (ECB) stance than the Federal Reserve’s (Fed) and also on thinking that the global easing in financial conditions would benefit to the European cyclical stocks. But the RSI indicator remain near the overbought territory, warning that it could soon be time for a minor downside correction – which could be an interesting dip buying opportunity for European stock investors as the rising geopolitical tensions with the other side of the Atlantic Ocean is expected to further boost the ECB support and the defensebudgets.

Across the Atlantic, things were looking pretty bad last Friday. The US stocks were hit by an ugly selloff on weaker-than-expected economic data and exploding inflation expectations. In fact, the US 5-10 year consumer inflation expectations hit the 3.5% mark – the highest since 1995 – on prospects of massive tariffs from Trump government and worsening trade relations with the rest of the world. More than half of the surveyed also think that unemployment will rise over the next year. This being said, it’s good to note that the spike in bad expectations was almost fully driven by respondents that qualify themselves as Democrats. But hey, the facts are the facts and massive tariffs, mass firings and plans of mass deportation will certainly have an impact. As such, the sight of softer-than-expected economic data and the spike in inflation expectations – that are dangerous because they tend to be self-fulfilling – sent the US indices severely lower on Friday. The S&P500 tanked 1.71%, Nasdaq 100 dropped more than 2% while the Dow Jones index fell 1.69%, as well. Small and mid-cap indices were hit heavier: the S&P400 for example tanked nearly 2.40% and is down by almost 10% since the November peak while the small caps tumbled nearly 3% and are down by more than 10% since the November peak – meaning that they are now in the correction territory – as the Trump optimism is being eaten by the tariffs and explodes costs (and cost expectations) to an extent that small businesses could hardly afford. And the Fed is no longer looking like it could continue to lower interest rates as inflation expectations are exploding. So yes, the aggressiveness of Trump’s America First policies could backfire.

This week, the US will release its latest GDP and PCE updates. The US GDP is expected to have grown 2.3% in Q4, down from 3.1% printed earlier. Sales will likely remain strong for now, while the PCE index – the Fed’s favourite gauge of inflation due Friday – could print an uptick and further temper the Fed rate cut expectations. Interestingly however, the uptick in inflation expectations that triggered a sizeable selloff in US equities last Friday couldn’t give a sustainable support to the US dollar. The US dollar gained on Friday but is pulled to the lowest levels since December this morning in Asia. The improved euro appetite and the sharp gains in the Japanese yen on expectation that the Bank of Japan (BoJ) would continue hiking rates are weighing on the dollar appetite along with the trade worries. I also believe that the positive correlation between the rising geopolitical tensions and the dollar purchases is reversing for good as investors outside the US realize that pushing the US dollar higher would only make America stronger to hit the others stronger. The US dollar index slipped below the 100-DMA and is about to test an important Fibonacci level, the 106 major retracement on September to January Trump rally. A move below this level will force the index into the medium-term bearish consolidation zone and pave the way for further weakness.

In energy, crude oil cleared the 100-DMA support without much pain and tumbled more than 3% on Friday. The global trade uncertainties and Trump’s ‘drill baby drill’ policies continue to weigh heavier than the geopolitical uncertainties in oil prices. Support is seen near the $70pb this morning but risks remain tilted to the downside. The upside potential looks limited into the $72.50/73.15 area that shelters the minor 23.6% Fibonacci retracement on the January to February pullback and the 50-DMA.

In focus today

Today, focus turns to the final inflation release for the euro area in January. The final print will allow us to digest the increase in January, which was likely driven by many one-off factors.

In Germany, we receive the Ifo index for February. It will be interesting to see if it mirrors the PMI data on Friday, which saw a marginal uptick in the composite measure - mainly attributed to an increase in the weak manufacturing sector.

The focus for the rest of the week will be on country CPIs for February from Germany, Spain, and Italy. Keeping an eye on Europe, we also get euro negotiated wages and credit growth. In the US, the Fed's preferred measure of inflation, the PCE, is due for release on Friday, while we continue to closely monitor any tariff announcement from the Trump administration and any news on the geopolitical front.

Economic and market news

What happened since Friday

The German election makes a two-party government between the conservative CDU/CSU and the Social Democrats (SPD) the most likely result, which is a positive outcome for the German economy. Markets have also reacted positively to the news by strengthening the euro by 0.6% during Asian trading hours while DAX futures have climbed 1.1%. The conservative chancellor Friedrich Merz is almost certain to become the next chancellor as his party emerged as the biggest one with 28.6% of the votes. A majority government with the Social Democrats is possible because two parties fell below the 5% threshold for entering the parliament, namely the FDP at 4.33% and the BSW at 4.97%. This gives 328 seats to the CDU/CSU and SPD, above the 315 needed for a majority. A two-party "Grand coalition" government is a positive outcome because decision making is easier than in a three-party government. Negotiations to form the government will likely take one to two months.

We see a 70% probability for a reform of the "debt brake" to allow more borrowing in German given the results. In terms of defence spending and support for Ukraine, the election outcome was not the best scenario because the far-right (Afd) and the Left party combined secured 34.3% of the votes. Therefore, they will be able to block off-budget defence funds and legislation that requires two-thirds majority. Yet, with a less fragmented Parliament and a likely two-party government Germany's presence in the EU will likely be stronger compared to the previous government, which is positive news. For more details, please see Flash: German election - A positive outcome for markets and the economy, 24 February.

Friday was all about February PMIs, with releases across most major economies. In the euro area, the composite PMI was lower than expected at 50.2 (cons: 50.5), mainly attributed to the services sector PMI declining to 50.7 (cons: 51.5), while the manufacturing measure ticked up to 47.3 (cons: 47.0). The services PMI was dragged down by a very large decline in the French services sector, while Southern Europe saw rising PMIs. Looking ahead, we expect the manufacturing sector to gradually improve, climbing back above 50 at the end of 2025, spurred by lower interest rates.

In the UK, the overall report was slightly on the weak side, with manufacturing lower than expected at 46.4 (cons: 48.5) while services printed stronger than anticipated at 51.1 (cons: 50.8) - leaving the composite little changed at 50.5 (cons: 50.6). UK retail sales for January was also announced, which was stronger than expected with retail sales ex auto fuel rising 1.2% y/y (cons: 0.6%, prior; 2.1%). The topside surprise was due to a rise in sales from food stores and online retail, but the December figures were downwardly revised across the board, limiting the overall surprise.

In the US, the PMI reading was similar to the European print, as the manufacturing index continued improving to 51.6 from 51.2 (cons: 51.5), while the services measure declined to 49.7 from 52.9 (cons: 53), the weakest figure since January 2023. Thus, the composite measure was barely above the neutral level at 50.4 (prior: 52.7). Looking at details, the services output prices index fell to the lowest level since May 2020 and below its pre-covid average, while employment indices declined across both manufacturing and employment. On a more positive note, manufacturing price indices and order-inventory balances continued to rise. Overall, we see the print as clearly dovish in light of the Fed's stance.

The final release of the inflation expectations from the University of Michigan for January showed that 1y expectations were unchanged from the flash estimate at 4.3%, while the 5y measure was revised higher to 3.5% from 3.3% - the highest level since April 1995. Importantly, different inflation indicators are yielding mixed signals at the moment.

In geopolitics, Ukrainian President Zelenskyy stated for the first time that he is willing to step down his presidency to secure Ukraine a NATO membership or achieve long-lasting peace. The remark comes after the recent weeks of focus on striking a ceasefire deal, with the US holding bilateral talks with Russia in Saudi Arabia. Zelenskyy also rejected the Trump administration's demands for a significant share of the proceeds from extracting Ukrainian mineral deposits. We will be hosting a webinar on 27 February from 09.30-10.00 shedding light on the possible outcomes and economic implications if a ceasefire is reached.

Equities: What looked like a rebound day for equities turned sour at the US opening bell. Global equities closed a full -1% lower, driven by the US with S&P 500 -1.7% and small cap Russell 2000 a full -2.9% lower. Considering this, Europe outperformed massively with Stoxx 600 even 0.5% higher. The US session ticked all the boxes of risk-off. Investors sold off cyclicals (tech, consumer staples, industrials down 2-3%) and bought into defensives (staples and utilities in green). Small caps underperformed considerably, down almost -4% for the week. VIX rose north of 18, highest since early February. Investors flocked into bonds with US10y moving towards 4.4% after briefly touching 4.57% earlier this week. Bitcoin dropped -4% and oil prices -3%. Gold was the outlier, up "only" 0.1%.

This concludes a -1.5% sell-off for global equities the last week, the first down-week since January. Note that Europe was higher (0.5% wtd) so outperformance is still substantial. Light in the tunnel today with US futures a notch higher again.

FI: US Treasury yields rallied on Friday on the back of weaker data and the speculation that the spending cuts from the Department of Government efficiency will slow the economy more than expected. This has also led to a tighter spread between 10Y Treasuries and Bunds during February and they are now again below 200bp. In Germany, CDU/CSU won the election as indicated by the polls and the head of CDU/CSU Merz is expected to form a coalition with SPD and possibly one more party.

FX: Commodity currencies lost out to JPY, CHF and USD on Friday as overall risk sentiment turned sour to end the week. EUR made a slight bounce following results of the German election when markets opened yesterday.

Daily Pivots: (S1) 1.0436; (P) 1.0474; (R1) 1.0499; More...

Intraday bias in EUR/USD remains neutral and outlook is unchanged. Strong resistance is expected from 38.2% retracement of 1.1213 to 1.0176 at 1.0572 to complete the consolidation pattern from 1.0176. On the downside, break of 1.0400 support will turn bias back to the downside for 1.0176/0210 support zone. However, decisive break of 1.0572 will raise the chance of reversal, and target 61.8% retracement at 1.0817.

In the bigger picture, immediate focus is on 61.8 retracement of 0.9534 (2022 low) to 1.1274 (2024 high) at 1.0199. Sustained break there will solidify the case of medium term bearish trend reversal, and pave the way back to 0.9534. However, reversal from 1.0199 will argue that price actions from 1.1274 are merely a corrective pattern, and has already completed.

Daily Pivots: (S1) 148.55; (P) 149.65; (R1) 150.37; More...

Intraday bias in USD/JPY stays on the downside at this point. Fall from 158.85 is seen as the third leg of the pattern from 161.94 high. Deeper decline should be seen to 61.8% retracement of 139.57 to 158.86 at 146.32 next. On the upside, above 150.72 resistance will turn intraday bias neutral and bring consolidations first, before staging another decline.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). In case of another fall, strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 1.2615; (P) 1.2647; (R1) 1.2669; More...

Intraday bias in GBP/USD remains on the upside as rise from 1.2099 is in progress. Further rally should be seen to 1.2810 resistance first. Firm break there will target 61.8% retracement of 1.3433 to 1.2099 at 1.2923 next. On the downside, below 1.2562 minor support will turn intraday bias neutral again first. But another rise will remain in favor as long as 1.2331 support holds, in case of retreat.

In the bigger picture, rise from 1.0351 (2022 low) should have already completed at 1.3433 (2024 high), and the trend has reversed. Further fall is now expected as long as 1.2810 resistance holds. Deeper decline should be seen to 61.8% retracement of 1.0351 to 1.3433 at 1.1528, even as a corrective move. However, firm break of 1.2810 will dampen this bearish view and bring retest of 1.3433 high instead.

Daily Pivots: (S1) 0.8962; (P) 0.8984; (R1) 0.8999; More…

Intraday bias in USD/CHF remains neutral. Consolidation pattern from 0.9200 might extend with deeper decline. But larger rally is still expected to continue as long as 38.2% retracement of 0.8374 to 0.9200 at 0.8884 holds. On the upside, above 0.9053 will bring retest of 0.9200 resistance. However, sustained break of 0.8884 will indicate bearish reversal, and target 61.8% retracement at 0.8690 instead.

In the bigger picture, decisive break of 0.9223 resistance will argue that whole down trend from 1.0342 (2017 high) has completed with three waves down to 0.8332 (2023 low). Outlook will be turned bullish for 1.0146 resistance next. Nevertheless, rejection by 0.9223 will retain medium term bearishness for another decline through 0.8332 at a later stage.

The German election makes a two-party government between the conservative CDU/CSU and the Social Democrats (SPD) the most likely result (75%), which is a positive outcome for the German economy. Markets have also reacted positively to the news by strengthening the euro by 0.6% during Asian trading hours while DAX futures have climbed 1.1%. The conservative chancellor Friedrich Merz is certain to become the next chancellor as his party emerged as the biggest one with 28.6% of the votes. A majority government with the Social Democrats is possible because two parties fell below the 5% threshold for entering the parliament, namely the FDP at 4.33% and the BSW at 4.97%. This gives 328 seats to the CDU/CSU and SPD, above the 315 needed for a majority. A two-party "Grand coalition" government is a positive outcome because decision making is easier than in a three-party government. A new government will likely take office in two months' time.

The far-right Alternative for Germany (AfD) became the second largest party with 20.8% of the votes, which is double the votes it got in the last election but at the same time in line with election polls. Being the sole party who has certainly refused to change the constitutionally enriched "debt brake" to allow more debt we see the chance of a reform being 60%. Such a reform requires a two-thirds majority and the CDU/CSU, SPD, Greens, and The Left have 76% of the votes. The reform will depend on the CDU as they have given mixed signals, which is the reason we estimate 70% chance of it happening (see next page for details).

In terms of defence spending and support for Ukraine, the election outcome was not the best scenario because the far-right (Afd) and the Left party combined secured 34.3% of the votes. Therefore, they will be able to block off-budget defence funds and legislation that requires two-thirds majority. Yet, with a less fragmented Parliament and a two-party government Germany's presence in the EU will likely be stronger compared to the previous government, which is positive news.

Because the majority for a "Grand coalition" is so slim (13 seats) Merz might want to include the Green party in a coalition to not be pressured by SPD the members who are the least aligned with his policies, so it is 75% certain that we get a Grand coalition and 25% chance of a "Kenya" government. Since the BSW came so close to the 5% threshold there will likely be a recount of the votes to make sure the preliminary result is correct. We must wait for that before the results are 100% final.

Full report in PDF.

Daily Pivots: (S1) 0.6336; (P) 0.6373; (R1) 0.6393; More...

Intraday bias in AUD/USD stays neutral for the moment. On the downside, firm break of 0.6327 support will suggest that the corrective rebound from 0.6087 has completed ahead of 38.2% retracement of 0.6941 to 0.6087 at 0.6413. Intraday bias will be turned back to the downside for retesting 0.6087 low. Nevertheless, sustained break of 0.6413 will pave the way back to 61.8% retracement at 0.6615, even still as a correction.

In the bigger picture, fall from 0.6941 (2024 high) is seen as part of the down trend from 0.8006 (2021 high). Next medium term target is 61.8% projection of 0.8006 to 0.6169 from 0.6941 at 0.5806. In any case, outlook will stay bearish as long as 55 W EMA (now at 0.6505) holds.

Daily Pivots: (S1) 1.4183; (P) 1.4210; (R1) 1.4251; More...

Intraday bias in USD/CAD remains neutral and more consolidations could be seen above 1.4150. Further decline is expected with 1.4378 resistance intact. Fall from 1.4791 is seen as a correction to rally from 1.3418. Break of 1.4150 will target 1.3946 cluster support (61.8% retracement of 1.3418 to 1.4791 at 1.3942).

In the bigger picture, long term up trend is tentatively seen as resuming with prior breach of 1.4667/89 key resistance zone (2020/2015 highs). Next target is 100% projection of 1.2401 to 1.3976 from 1.3418 at 1.4993. This will remain the favored case as long as 1.3976 resistance turned support holds (2022 high), even in case of deep pullback.

Daily Pivots: (S1) 0.9370; (P) 0.9403; (R1) 0.9425; More....

Intraday bias in EUR/CHF stays neutral as range trading continues. On the downside, firm break of 0.9359 will revive the case that choppy rise from 0.9204 is merely a correction and has completed. Deeper fall should then be seen back to retest 0.9204 low. However, firm break of 0.9516 and sustained trading above 0.9481 fibonacci level will carry larger bullish implication and extend the rise from 0.9204.

In the bigger picture, sustained trading above 38.2% retracement of 0.9928 to 0.9204 at 0.9481 should confirm that whole fall from 0.9928 has completed at 0.9204. Further rally should then be seen back to 61.8% retracement at 0.9651 and above. However, another rejection by 0.9481 will keep outlook bearish for extending larger down trend through 0.9204 at a later stage.