German Chancellor Angela Merkel has failed in her attempts to form a coalition, which now leaves the political situation in Germany in quite a dire position. The last few weeks have been spent around the negotiating table but have not managed to produce any results. What this does now mean is that Germany will go back to the polling stations to see if there will be a different outcome.

The third biggest political party in Germany is a far-right group which received a significant boost in the last election and there may be concerns that their gains could be increased in another election. Most of the problems surrounding German politics has come from an immigration policy which saw 1 million refugees being let into the country. Angela Merkel has struggled ever since that decision and this latest set-back is being billed as the potential end of her reign in charge of the nation.

The effect of an election on exchange rates

Elections create enormous volatility for the host currency which in this case will affect the whole Eurozone. Germany is the engine room for the single currency and one of only 4 net contributors once the UK leaves. Political turmoil and uncertainty could have a drastic effect on the Euro and result in a multitude of losses.

Should a second election be called I wouldn’t be surprised to see immediate 2-3% losses for the Euro taking the GBP/EUR exchange rate back above 1.15 for the first time in nearly half a year. Furthermore, the outcome of a German election could put an untested leader or party in charge which would be likely to test investors nerves. Angela Merkel has also been a major influencer in the European Union, being one of the EU’s biggest advocates. Should the next leader not hold the same opinion as Merkel there is every chance as the EU’s biggest contributor could put the Union at risk of major change. Whilst this seems like a domestic issue the total fallout could be much wider reaching, either way the Euro could come under major pressure for the first time in a long time.