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The EURUSD pair has reacted negatively to the weekend's German Federal Elections, which saw German Chancellor Angela Merkel regain power. However, her CDU party lost ground to other-parties, including the far-right AfD party, who won enough votes to enter German parliament.

On the market open, the EURUSD spiked lower to 1.1897, but has quickly recovered initial intraday losses, with price-action now trading around the former weekly EURUSD pivot point, at 1.1938.

The EURUSD is currently range-bound between 1.1897-1.2006, with the pair lacking follow-through above 1.1900, with buyers also undecided above the 1.2000 level.

A definitive higher time-frame price below 1.1884 should accelerate euro selling towards 1.1815 and 1.1740, whilst a higher time frame price close above the 1.2030 level is needed, for further EURUSD upside towards 1.2130 and 1.2260.

Key intraday support is found at the daily pivot, at 1.1928, with further support at 1.1915 and 1.1884.

To the upside, intraday EURUSD resistance is found at the weekly pivot, at 1.1948 and 1.1961. Above 1.1961, further resistance is found at 1.1979 and 1.1999.

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German Chancellor Angela Merkel secured her fourth term in office on Sunday, although the victory was overshadowed by an upsurge in alt-right populism. The ‘Alternative for Germany’ or AfD, secured roughly 13% of the popular vote in the federal election to become the first overtly nationalist party to enter the Bundestag in 60 years.

On the economic calendar, investors can expect a slew of monetary policy news at the start of the week. Bank of Japan (BOJ) Governor Haruhiko Kuroda is scheduled to deliver a speech around 5:35 GMT. Later in the day, European Central Bank (ECB) President Mario Draghi will also deliver remarks.

On the US policy circuit are regional Fed Bank presidents William Dudley (New York), Charles Evans (Chicago) and Neel Kashkari (Minneapolis). Kashkari is a voting member of this year’s Federal Open Market Committee (FOMC).

In data news, the CESifo Group will release its German business sentiment index at 08:00 GMT.

Shifting gears to North America, the Chicago Fed will release its national activity index at 12:30 GMT. The monthly indicator is used to gauge the performance of the overall economy.

Later in the session, the Dallas Fed will unveil its monthly manufacturing business index for September.

Earlier in the day, the Nikkei manufacturing PMI showed a slight uptick in Japan’s factory sector this month. The preliminary index edged up 0.4 points to 52.6. Analysts in a median estimate called for a reading of 53.4. Any PMI above 50 signals expansion in economic activity, whereas a reading below that level denotes contraction.

EUR/USD

All was quiet on the euro front on Monday, as investors digested the German election result. The EUR/USD was down 0.2% at 1.1929 in Asian trade, as the market continued to pull away from the all-important 1.2000 level. The pair is directionless around the 20-day moving average, but remains far above the 100-day and 200-day simple moving averages. This suggests that further upside may be in store.

GBP/USD

Pound sterling rose in overnight trade, reaching a session high of 1.3530 US. Cable has been in a bullish uptrend since the Bank of England (BOE) sent its strongest signal yet that rates could rise later this year. The GBP/USD has gained more than 700 pips over the past month. However, near-term upside remains capped below 1.3600. On the opposite side of the ledger, immediate resistance is located at 1.3450.

USD/JPY

The USD/JPY broke higher in early-week trade to retake the 112.00 handle. The pair touched a session high of 112.46 before paring gains later in the session. The dollar-yen cross has been supported by improved risk sentiment in the financial markets. As a result, the yen’s haven appeal has waned considerably.

EURUSD maintains a neutral bias since August 28 but the underlying bullish trend still holds firm from the April low of 1.0820.

The short-term technicals are neutral and indicating that upside momentum has weakened. RSI and MACD are both still in bullish territory although the indicators have been heading lower during the past two weeks. This could suggest that EURUSD remains at risk of weakening further especially after the pair’s inability recently to make strong headway through resistance at the September 8 high of 1.2091.

More range trading seems the most likely prospect for EURUSD in the near term but a break below the 1.1900 support would shift the focus to the downside for a move towards support at 1.1661 (August 17 low). A deeper fall would target a previous resistance-that-could-turn-support zone at 1.1471. Falling below this level would see the market retrace more than 50% of the 1.0820 – 1.2091 uptrend and likely move lower to 1.1290 and then 1.1100 before reversing the whole uptrend.

Trend indicators are painting a bullish picture, with the 50-day and 200-day moving averages being positively aligned. The underling bullish trend remains intact but upside momentum has stalled. A sustained break above 1.2091 is needed to see a resumption of the uptrend with scope to rise to the 1.2400 area. In the near term, more range trading is expected but there is risk for a move to the downside.

Angela Merkel has secured her fourth term as German chancellor, but politics in Europe's largest economy is becoming more complicated. When Emmanuel Macron won the French presidency by a decisive margin over Marine Le Pen, many investors thought that this was the end of the populist tide – it now seems they were wrong. The rise of a populist, far-right alternative party in Germany is getting much attention, after securing more than 13% of the votes. Not only did the AfD secure enough seats to enter the Bundestag, the results also make them the third largest party in Germany, and this will no doubt make things more complicated for the chancellor. Merkel now should form the first three-party coalition, after the SPD decided to go into opposition; this is not likely to happen overnight. Given that the election results were expected, the impact on the Euro was not very powerful. EURUSD initially fell 60 basis points, and then recovered half of its losses. However, the noise out of Germany in the next couple of weeks will likely lead to some volatility, and probably a further correction in EURUSD towards 1.17-1.18. I would see a significant correction as an opportunity to build long positions, based on continued improvement in the EZ economy and central banks' conversion.

The Kiwi was under even greater pressure early Monday, falling more than 1% against the USD. Although as expected, the National Party won the largest number of votes, similarly to Germany's position, it is not enough to gain a majority in the parliament and this may lead to some anxiety amongst investors. Forming a coalition will also take time, and will most likely keep NZD under some pressure.

The announcement from the Federal Reserve last Wednesday, that it would begin unwinding its balance sheet and that they are keeping the option of another US interest rate rise in 2017 on the table, is still encouraging buying demand for the Dollar.

Fed Chair Janet Yellen is scheduled to speak on Tuesday, at the 59th NABE Annual Meeting, to further discuss her views on inflation, uncertainty and monetary policy. She is among many Fed speakers who will share their thoughts after a hawkish statement. Given that there were no economic or fiscal policy surprises since the Fed's last decision, I think we will get more hawkish rhetoric. Thus, a shift in market sentiment is unlikely to occur. ECB's Mario Draghi, BoE's Mark Carney, and BoC's Stephen Poloz are also set to speak on different occasions this week.

Investors will be more concerned about President Trump's announcement in Indiana on Wednesday. There are high expectations that he will provide critical details on tax reforms. The only leaked information so far, is that the corporate tax may be lowered, from 35% to 20%. This is still higher than what Trump had hoped for, but if legislation is passed before year-end, it will still be good news for equity markets.

The euro and the kiwi were trading lower on Monday after the election weekend for Germany and New Zealand ended with expected outcomes but insufficient votes to form a government. Meanwhile, geopolitical tensions continued to escalate between the US and North Korea as another round of threats took place during the weekend. However, the markets ignored the fresh warnings, with the safe-haven gold retreating near to one-month lows.

On Sunday, exit polls in Germany favored Chancellor Angela Merkel for the fourth time with the winning center-right party CDU/CSU earning 33% of the votes compared to 20.5% attracted by the center-left SDP party. This was the worst result for Merkel’s party as it was the lowest seen since 1949, while her current SDP coalition partner said they would go into opposition after their percentage of votes fell back to post-war levels. On the other hand, the far-right party ADF won 12%, gaining enough seats to enter the parliament after more than half a century. Now, rumors suggest that Merkel is likely to discuss with the FDP and the Greens (Jamaica coalition) to build a coalition.

In New Zealand, general elections held on Saturday showed a victory for the ruling National Party and the current Prime Minister Bill English, with the party winning 46% of the votes compared to 35.8% gained by the opposition Labour party. Despite leading the elections, the next leader is still unknown as the votes earned were not enough to form a government. Therefore, during the next few days, the National Party will start discussions with smaller parties to secure a majority and form a coalition government.

The euro tumbled by almost 0.50% to $1.1896 before it rebounded to $1.1913. The kiwi also lost ground against the dollar, dropping by 0.90% to $0.7269 but managed to climb to $0.7281 afterwards.

Japan is also said to head to polls next month after the Japanese Prime Minister, Shinzo Abe, called for snap elections last week to take advantage of his improved ratings. According to the Nikkei Business daily survey, 44% of the voters support Abe’s LDP party, while 8% prefer the opposition Democratic party. Besides that, Abe stated on Monday that he plans to deliver a stimulus package of $17.8bn by the end of the year.

The yen pulled back during early Asian session trading following the disappointing preliminary manufacturing PMI readings out of Japan for the month of September. However, it pared losses afterwards, with dollar/yen falling from 112.52 earlier to 112.28 before the Asian markets close.

Geopolitical tensions did not ease during the weekend as the US president, Donald Trump and North Korea’s foreign minister, Ri Yong Ho, exchanged threats after US airforce bombers flew over international airspace east of North Korea. At his speech before the UN General Assembly, Ri Yong Ho said on Saturday that targeting the U.S. mainland with its rockets was inevitable after “Mr. Evil President” Trump called Pyongyang’s leader a “rocket man” on a suicide mission”. A few hours later, Tump tweeted on social media, that if the Noth Korean foreign minister repeats Kim’s thoughts, “they won’t be around much longer”.

Despite this, gold was down by 0.41% on the day at $1,291.11 per ounce, as investors ignored the renewed war of words and preferred to look for riskier assets. The dollar index jumped by 0.20% 92.11.

The pound bounced up by 0.40% to $1.3534 following a deep fall on Friday, when fears rose over expectations that May will announce the country’s exit from the EU earlier than the determined date following her highly anticipated Brexit speech. Moreover, after May’s speech, Moody’s downgraded Britain’s credit rating from Aa1 to Aa2 with the justification that the government’s debt reduction plans were off course so far while Brexit would bring further economic uncertainties.

Regarding energy markets, WTI crude was trading lower by 0.28% at $50.52 and Brent was down by 0.11% at $56.80 per ounce.

Next up, currencies are expected to fluctuate on speeches made by ECB and Fed policymakers who are likely to give further clues on monetary policy.

Key Highlights

• The Euro remains in an uptrend, but struggling to hold gains against the US Dollar above 1.1850.
• There is a contracting triangle forming with support near 1.1860 on the 4-hours chart of EUR/USD.
• The US Services PMI for Sep 2017 (Prelim) released this past week posted a decline from 56.0 to 55.1.
• The US Manufacturing PMI preliminary reading (Sep 2017) increased from 52.8 to 53.0.

EURUSD Technical Analysis

The Euro remained in a broad range above 1.1850 against the US Dollar. However, the EUR/USD is under pressure and might attempt a downside break below 1.1850 in the near term.

Looking at the 4-hours chart of EUR/USD, there is a contracting triangle forming with support near 1.1860. The triangle support at 1.1860-50 is also near the 200 simple moving average.

On the upside, an initial resistance is around 1.1940 and the 100 simple moving average (H4). Above 1.1940, the triangle resistance is at 1.1970. A proper close above 1.1970 is needed for the Euro buyers to gain momentum.

On the downside, a break of the triangle support or 1.1850 might ignite further losses towards the 1.1820 level. Below 1.1820, the next important support is at 1.1780.

US Manufacturing PMI

Recently in the US, the Manufacturing Purchasing Managers Index (PMI) for Sep 2017 (Prelim) was released by the Markit Economics. The forecast was slated for a rise from the last reading of 52.8 to 53.0.

The actual result was in line with the forecast, as the PMI rose to 53.0. On the other hand, the US Services PMI was forecasted to decrease from 56.0 to 55.9, but it declined to 55.1.

Commenting on the Manufacturing PMI report, the Chief Business Economist at IHS Markit, Chris Williamson, stated:

The US economy showed encouraging resilience in a month of hurricane disruption. Although the September surveys indicated a moderation in growth of business activity, the overall rate of expansion remained robust.

Overall, it seems like the EUR/USD pair is struggling to remain above 1.1860 and remains at a risk of a breakdown in the near term. Today’s European Central Bank’s President Mario Draghi’s speech might impact EUR/USD and could ignite a break either above 1.1970 or below 1.1860.

Weekly

    •    Last Candlesticks pattern: Shooting star 
    •    Time of formation: 31 Jul 2017
    •    Trend bias: Near term up

Daily

    •    Last Candlesticks pattern: Shooting star
    •    Time of formation: 2 Aug 2017
    •    Trend bias: Up

EUR/USD – 1.1910

Despite staging another rebound to 1.2034 last week, the subsequent sharp retreat formed a black candlestick on the daily chart, suggesting recent upmove is not ready to resume yet, hence further consolidation below recent high at 1.2093 would take place and another retreat to 1.1861 support cannot be ruled out, however, euro needs to penetrate previous support at 1.1838 to confirm a temporary top has been made at 1.2093 earlier this month, bring retracement of recent upmove to 1.1800, then towards 1.1730-40 which is likely to limit downside and price should stay above support at 1.1662.

On the upside, expect recovery to be limited to 1.1950-60 and bring another retreat. Above said resistance at 1.2034 (last week’s high) would revive bullishness, bring retest of 1.2093 but break there is needed to confirm recent upmove has resumed and extend subsequent rise towards dynamic resistance at 1.2165-70 (50% Fibonacci retracement of 1.3993-1.0340) and later towards 1.2200-10 but loss of upward momentum should prevent sharp move beyond 1.2250-60 and reckon 1.2300-10 would hold from here.

Recommendation: Stand aside for this week.

On the weekly chart, as euro met resistance at 1.2034 last week and has retreated, suggesting further consolidation below recent high at 1.2093 would take place and test of 1.1861 support cannot be ruled out, however, a drop below previous support at 1.1838 is needed to suggest a temporary top is possibly formed, bring further fall to 1.1730-35, having said that, only break of previous support at 1.1662 would add credence to this view, bring retracement of recent upmove to 1.1545-50, then towards 1.1500 but price should stay well above the Kijun-Sen (now at 1.1332).

On the upside, above 1.2000-05 would bring test of 1.2034 but break of latter level is needed to signal upmove has resumed for retest of 1.2093, above there would extend recent upmove from 1.0340 low to 1.2160-70 (50% Fibonacci retracement of 1.3993-1.0340) but loss of upward momentum should limit upside to 1.2220-30 and reckon 1.2300-10 would hold from here, price should falter well below 1.2390-00, bring another retreat later.

The results of the German Election have re-elected Chancellor Angela Merkel for a fourth term. Her CDU party won fewer votes than was expected and Chancellor Merkel commented that 'the CDU would have hoped for better result, but we mustn't forget – looking back at an extraordinary challenge – that we nevertheless achieved our strategic objectives: we are the strongest party. We have mandate to form the new government and we will form the new government.' Chancellor Merkel will now be tasked with forming a coalition Government which is likely to take several months. Per the latest results the CDU won 32.5% of the vote compared to the 2013 election that saw them win 41.5%. The normally strong SPD's 20% of the vote is a post war low for the party, whilst the right-wing nationalist AfD party, appears to have won 13.5% of the vote, making it the country's third largest party. With the AfD securing third place this may cause concerns, as it may disrupt Merkel's plans for further Eurozone integration.

In New Zealand, Prime Minister English's National Party won the most votes in their General Election, although it was not sufficient to ensure a majority. The uncertainty of when a majority coalition will be formed has weighed on the Kiwi.

In Japan, Prime Minister Abe is expected to announce that the country will hold a snap election in October.

GBP was sold against USD and its major counterparts on Friday on news that the credit ratings agency, Moody's, announced it had downgraded the United Kingdom' long term issuer rating to AA2 from AA1 and changed the outlook to stable from negative. GBP had suffered earlier in the day as Prime Minister Theresa May had failed to give any substantive details on how the United Kingdom might retain preferential access to the Eurozone's single market. Prime Minister May's speech in Italy gave little detail and provided no new information as to the direction of the discussions, and outcomes, between the UK and Europe.

North Korea's Foreign Minister, Ri Yong-ho, addressed the United Nations on Sunday, providing more rhetoric on the war of words between the US and North Korea. He told those assembled that 'it was all the more inevitable' that the regime's rockets would 'visit' the US mainland. Ri also added that it was Trump, not Kim, who was on a 'suicide mission'. He likened Trump to 'the sound of a dog barking' and commented that he felt sorry for Trump's aides when asked about the Presidents 'rocket man' nickname for Kim. There has been the inevitable flight to safe havens, with JPY and Gold improving against

USD. The markets are keenly watching for the next 'round' of rhetoric which could lead to more risk-off sentiment in the coming days.

EURUSD is 0.25% higher in the early trading session; currently trading around 1.1925.

USDJPY moved higher overnight to currently trade around 112.25.

GBPUSD suffered with a credit downgrade and lack of information from Prime Minister May on Brexit solutions on Friday. GBPUSD traded as low as 1.3449 on Friday, before retracing higher over the weekend to currently trade around 1.3540.

Gold is down 0.35% in early Monday trading, currently trading around $1,294.

WTI traded in a relatively narrow range on Friday and is little changed overnight. Currently, WTI is trading around $50.60pb.

Major economic data releases for today:

At 09:00 BST, the CESifo Group will release German IFO-Business Climate sentiment index, Current Assessment & Expectations for September. The Institute surveys more than 7,000 enterprises on their assessment of the business situation and their short-term planning. A release above consensus will see EUR gain, with a lower than forecast release putting downward on pressure on EUR.

Despite the general perception that the German election would be a boring game, the outcomes contain several surprises and should drag the process of deeper EU integration. Angela Merkel's CDU and its sister party CSU have secured 246, out of 709 seats in the new Bundestag, marking a decline of -65 seats from the 2013 term. With CDU remaining the biggest party, Merkel will no doubt be the Chancellor for a fourth term. However, it is challenging for her to form a coalition government this time. Back in 2013, the CDU/CSU formed a Grand Coalition government, with SPD as its junior partner. This time, with SPD's number of seats sharply falling to 153 (down -40 seats from 2014), the party has pledged that it would head into opposition this time. Indeed, the SPD during the election period had been complaining about the loss of popularity after forming coalition with CDU/CSU. Yet, Merkel has asked Martin Schulz, SPD's leader, to re-think. The Grand Coalition is expected to be the best for the financial markets, providing the least uncertainty and most favorable for deeper EU integration.

Besides Grand Coalition, another possibility is Jamaica – CDU/CSU + FDP + Greens. While this combination appears the most likely after SPD refuses to a re-run, the hurdles are high.CDU/CSU has highly preferred to work with FDP given the similarities in ideologies and platforms. Yet, FDP and Green are traditional rivalries. The two parties have different very different views on various issues, ranging from labor and social policy, to immigration policy; from fiscal policy to EU integration. There are few cooperation between the two parties in local level, let alone federal level. For economic and EU integration prospects of different coalition combinations: please visit: https://www.actionforex.com/action-insight/special-topics/44648-german-election-not-as-boring-as-you-think

The biggest surprise is undoubtedly the surge of AfD. The far-right party has gained 94 seats with a record high 12.6% of votes. The party has pledged to be spread its anti-immigration, anti-euro ideologies in the parliamentary speeches. Should it become the biggest opposition party (in case of Grand Coalition), AfD would chair the budget committee and impede the passage of EU integration bills. AfD’s surge has strong implications for CDU. Surveys suggest that over 20% of people voted for AfD this time had voted for CDU in 2013. This might lead some CDU legislators to take a more hawkish stance on EU and immigration issues in the future.

In short, the new government, be it the Jamaica or a re-run of the Grand Coalition, would merely be a knife-edge majority, making it more difficult to implement significant reforms, both in domestic policies and EU integration. We foresee a challenging four years for Merkel, whom SPD’s Schulz described as the 'biggest loser'

Weekly

    •    Last Candlesticks pattern: Dark cloud cover
    •    Time of formation: 10 Jul 2017
    •    Trend bias: Down

Daily

    •    Last Candlesticks pattern: Evening doji
    •    Time of formation: 7 Aug 2017
    •    Trend bias: Down

USD/JPY – 112.23

As the greenback has surged again after brief pullback to 111.11, adding credence to our bullish view that the rise from 107.32 low is still in progress for retracement of recent entire decline from 118.66 to 112.99-00 (50% Fibonacci retracement), then towards 113.50-60, however, loss of upward momentum should prevent sharp move beyond 114.30-35 (61.8% Fibonacci retracement) and resistance at 114.50 would hold from here, price should falter well below 115.00.

On the downside, whilst initial pullback to 111.65 cannot be ruled out, reckon said support at 111.11 would limit downside and bring another rise later to aforesaid upside targets. A daily close below the Tenkan-Sen (now at 111.01) would defer and suggest top is possibly formed, bring test of the lower Kumo (now at 110.50) and then towards the Kijun-Sen (now at 110.02) but it is necessary to see a break below support at 109.55 to indicate the rebound from 107.32 low has indeed ended.

Recommendation : Buy at 111.15 for 113.15 with stop below 110.15

On the weekly chart, the greenback extended the rebound from 107.32 to 112.72 last week, adding credence to our view that a temporary low has been made at 107.32, hence consolidation with mild upside bias remains for further gain to 112.99-00 (50% Fibonacci retracement of 118.66-107.32), however, break there is needed to retain bullishness and signal recent entire decline from 118.66 has ended, bring stronger rebound to 113.50-60, then towards 114.30-35 (61.8% Fibonacci retracement) but resistance at 114.50 should hold from here, price should falter well below psychological level at 115.00 and bring retreat later.

On the downside, although initial pullback to the upper Kumo (now at 111.36) cannot be ruled out, reckon support at 111.11 would limit downside and bring another rise later. A drop below 111.11 support would risk test of the Tenkan-Sen (now at 110.02) but a weekly close below there is needed to suggest top is possibly formed instead, bring further fall to support at 109.55, a drop below this level would signal the rebound from 107.32 has ended, then weakness to 109.00 and possibly towards support at 108.12 would follow.