German Election 2017: EURUSD and DAX Index Forecast

With September fast approaching, the focus is likely to temporarily shift from the speculation on the ECB’s next monetary policy move to Germany. Unlike the previous elections in the Eurozone, namely the Dutch and French elections, the German elections are not expected to deliver any surprising results.

At best, the elections are likely to become a Merkel versus Schultz affair. Both leaders are seen to favor further integration with the eurozone. The markets are, however, betting that Merkel’s Christian Democratic Union (CDU) will pocket another victory, with some alliances of course.

Angela Merkel was first elected as the Chancellor of Germany in 2005. She was also the first female Chancellor of Germany. The 2017 elections will see Ms. Merkel seeking a fourth consecutive term to lead Europe’s strongest economy.

Obvious by now, the volatility factor when it comes to the German election is somewhat more subdued than compared to other regional elections in the Eurozone. Still, the event could potentially bring some trading opportunities.

EURUSD – Is there more leg to the rally?

The common currency is no doubt one of the strongest performing currencies this year. The gains in the euro came mostly on the back of speculative bets. Investors are strongly inclined to believe that the European Central Bank will be tightening monetary policy in the near term.

Currently, speculation is rife that this announcement could come as early as September 7, when the ECB will be holding its next monetary policy meeting. It is also evident that the ECB’s governing council is somewhat cautious on how to communicate to the markets.

This was evident from the recent ECB meeting minutes where the topic was discussed but was eventually put off as officials wanted to time their communication correctly and to ward off any volatile market movements.

Even at the recent Jackson Hole symposium, the ECB President Mario Draghi refrained from going much into addressing the forward guidance on monetary policy. Still, the euro has remained the favorite currency this year among traders.

As a result, with the rally so strongly entrenched, for all we know, the common currency could give a muted response albeit posing a short-term knee-jerk reaction to the German elections.

The ideal scenario would be to look for any short-term correction in the EURUSD and positioning to the upside. However, a lot of this will depend on the outcome of the ECB meeting.

For the moment, the euro is likely to hit some resistance in the near term as price approaches to test the multi-year resistance level at 1.2042 – 1.1955 level. This is also evident by the hidden bearish divergence we see on the Stochastics oscillator.

If EURUSD does fail to break past the resistance level, we could expect the near term correction towards $1.1443.

German DAX – Watch for the breakout

The German DAX is another obvious choice for playing the German election outcome. The DAX rallied to highs of 12900. The index failed to breach the next big number of 13000 and has since then embarked on a correction.

Since July, the German DAX futures settled to trade within the range of 12300 and 11900. This range is likely to be maintained over the next couple of weeks with the potential of a breakout likely to coincide with the German election results.

The downside looks a bit difficult currently especially with the 119500 – 11900 levels proving to be a strong confluence of past support and resistance levels. A break down below this level could however see the German DAX moving into a steeper correction. This will put the next downside target to 11134 which marks the 61.8% retracement level from the November 2016 lows of 10013 to the June highs of 12948.

Technically, the biggest clue will be whether the DAX can make a higher low above the 11900 region of support. This could potentially set the stage for an upside breakout.