The euro has enjoyed a stellar run of late, rising almost 4 percent versus the dollar over the last three months. It currently sits at around $1.22, marking a three-year high.
That run, while aided in no small part by dollar weakness, has been seen as a reflection of thumping euro zone data and relative stability among EU members.
Ulrich Leuchtmann, head of FX and EM Research at Commerzbank, said Friday that Sunday’s decision has the potential to move the euro in either direction.
“Rejection threatens to lead to either a minority government in Berlin or to new elections. Both are not good for the euro simply because they would create uncertainty,” he said via email.
“More importantly, however, the GroKo (grand coalition) would probably be euro-positive because this constellation could represent the greatest degree of Germany’s support for the French president’s European initiative among all conceivable political constellations in Berlin.”
Leuchtmann said he could not forecast a result but that SPD delegates are normally “well-behaved party soldiers” who follow the leadership.
In a note Thursday, Morgan Stanley’s European FX team wrote that Sunday’s vote is the “key potential near-term risk” for unwinding the recent upward run for the euro.
It said a rejection of the deal could see the euro slip back down towards $1.17. Assuming a vote to pursue coalition talks is achieved, Morgan Stanley calls upside resistance at $1.23.
