A feeling of relief is likely to hit currency markets following Angela Merkel’s historic victory in the German general election. The overwhelming favourite obtained an estimated 42 per cent of votes which, in a country which has been used to coalition governments since the mid-1950s, was a huge surprise as this nearly met the level required to give her an absolute majority. Any doubts over her re-instatement are likely to be quashed and remove any risk aversion relating to the outcome of this election. Reaction so far has been relatively muted; however, we may now start to see a shift in focus to the string of PMI figures due from Germany and the Eurozone. Any shock results from these releases may damage the recent recovery made by the single currency.

Sterling

The pound will be hoping for a more stable few days following losses made on the back of some surprisingly poor retail sales data released last week. Investors will be hoping this was a one off; however, concerns over Thursday’s final Q2 GDP number are likely to remain.

US dollar

The US dollar will be hoping for a reprieve after enduring the majority of the spotlight last week following the Fed’s latest announcement over a delay in their tapering plans. The pound has since snapped back after initially moving substantially higher on the back of this announcement but remains at trading levels last seen in January of this year. In terms of data, it should be a quieter week for the US with much of the attention on Europe following Merkel’s reinstatement to the hot seat.

Euro

Following a quiet week in data terms for the euro, which allowed it to benefit unimpeded from the dollar’s demise, this week will provide a sterner examination of the real appeal of the single currency. The first test was passed with flying colours as Chancellor Merkel was re-elected with the largest share of the vote for any one party since 1990. The markets had harboured concerns that Merkel’s support of bailouts for struggling southern European nations might prove unpopular with voters and that her power base in any new coalition would be weakened. Despite her resounding victory, it will not be all smooth sailing as the choices of coalition party are limited to left leaning opponents of Chancellor Merkel’s right wing Christian Democrats following the failure of her recent partners, the Free Democrats, to achieve enough votes to earn representation in the Bundestag.