EUR/USD with Key Breakout: How German Elections Could Catalyze a Short Squeeze

EUR/USD Struggles for a Stable Break Above 1.0500

EUR/USD has been struggling to achieve a stable break above 1.0500 since last month, but there may now be a genuine opportunity. The chart is definitely becoming interesting as we analyze the results of the German elections over the weekend.

Election Results

There’s no major surprise as the CDU/CSU alliance led by Friedrich Merz celebrates, winning around 28.5% of the votes. This places them in a strong position to lead the next government.

The far-right party AfD also stirred excitement, securing about 20.8% of the votes. This marks a record result for them, approximately doubling their support compared to previous elections.

The biggest loser? That would be the party of the current Chancellor Olaf Scholz—the SPD, which has lost a significant portion of its support, finishing with around 16.4% of the votes. This is the worst result for the faction in federal elections. The Greens also deserve mention, winning about 11.6% of the votes but also experiencing a slight decline from previous elections.

How Does This Affect the Euro?

Now, everything hinges on coalition negotiations aimed at forming the next government in Germany. Merz’s conservatives will clearly not ally with the far-right, so the only potential partners left are the SPD and the Greens.

A classic option would be a coalition between CDU/CSU and SPD, but given the weak result for the social democrats, Merz might seek something more attractive. If so, this means inviting the Greens as well. However, this would require significant compromises from all participants.

A Key Issue in Coalition Negotiations: The German Debt Brake

This is the fiscal rule that limits the government’s deficit and prohibits federal states from incurring new debt. Its main goal is to ensure financial discipline.

The CDU/CSU are firmly “for” maintaining the debt brake, seeing it as a key mechanism for fiscal responsibility. Within the SPD, there are disagreements—some MPs want it reformed or temporarily suspended (as it was during the COVID-19 pandemic) to allow for greater budget spending. The Greens have long called for reforming the debt brake to encourage investments in environmental sustainability and infrastructure.

Putting it all together, there is no one-size-fits-all solution. A compromise must be found.

If Merz wants support from the other parties, he will need to show a willingness to make some concessions. This is also the scenario the markets are hoping for.

If the debt brake is changed or softened, this would mean increased investments in infrastructure and green energy. Increased government spending would stimulate growth, benefiting businesses and improving prospects for the German economy.

The only problem is that some will raise concerns about rising debt. But with one of the lowest debt-to-GDP ratios in the Eurozone, this is unlikely to be a serious issue—at least in the short term.

Ultimately, the positives outweigh the negatives, especially given the poor state of the German economy since last year. This gives hope that things might start to improve.

What’s Happening with the EUR/USD Chart?

It seems that buyers are waiting for a breakout above 1.0500. But is this coming too slowly and too late?

Even if a breakout occurs, serious resistance immediately appears from the 100-day moving average (the red line). Currently, the key level is 1.0547.

This means buyers will need to do much more to ensure a stronger upward breakout, as passing 1.0500 is just the beginning. Additionally, there needs to be solid follow-through to overcome the 100-day moving average and establish a stronger trend in the coming week.

According to CFTC data, leveraged funds are still holding net short positions, meaning short covering could intensify during the European session.

Traders are targeting options at 1.05, supporting the bullish momentum, and it may not be long before we see the January peak in sight.