Germany moves to the right, euro pares gains

The euro rose as much as 0.55% on Monday but has pared most of these gains. In the North American session, EUR/USD is trading at 1.0467, up 0.11%.

Merz’s conservatives win German election

Germany has voted and Friedrich Merz is slated to become the next president. Merz’s conservatives came in first place, followed by the far-right AfD party. Merz’s first order of business will be the formation of coalition government, likely with the Social Democrats. The new government will need to improve the flagging economy and will have to contend with the Russia-Ukraine war on its doorstep and the new Trump administration which is giving Europe a cold shoulder.

German business climate remained unchanged in February at 85.2, shy of the market estimate of 85.8. Businesses indicated less optimism about current business conditions and confidence weakened among service providers, although manufacturers were less pessimistic.

There were no surprises from eurozone inflation for January, which came in at 2.5% y/y, unchanged from the initial estimate. This marked the highest rate since July 2024, largely driven by a sharp jump in energy costs. Monthly, core inflation fell 0.3%, in line with the market estimate and following a 0.4% gain in December.  Core inflation gained 2.7%, confirming the initial estimate and ticking higher from the 2.4% gain in December. The core rate hasn’t moved in five straight months. Today’s inflation report indicates that inflationary risks remain which could complicate the ECB’s plans to reduce interest rates and kick-start the weak eurozone economy. The ECB meets next on March 6.

On Friday, US Services PMI for February disappointed and contracted to 49.7, down from 52.9 in January and below the market estimate of 53.0.  This marked the lowest level since January 2023.  The services sector, which has been the major driver of the US economy, showed strong growth until the end of 2024 and has weakened for two straight months.  The Manufacturing PMI improved to 51.6, up from 51.2 and above the market estimate of 51.5.

 EUR/USD Technical

• EUR/USD tested resistance at 1.0474 and 1.0499 earlier.
  1.0436 and 1.0411 are the next support lines

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