Currencies: Euro weakens after German election results

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The euro retreated against the dollar on Monday as investors absorbed the outcome of the German general election, which resulted in a win for Chancellor Angela Merkel’s conservative alliance, but with a sharp drop in support.

In addition, the anti-immigrant Alternative for Germany (AfD) party won around 13% of the vote, becoming the first far-right party to win seats in Parliament in more than 50 years.

Read: Merkel wins in Germany, but anti-immigrant party enters parliament with huge gains

“Though the presence of the AfD should not significantly impact German intentions regarding the EU in the immediate future, the rising populism dampened the mood in the euro markets,” said Ipek Ozkardeskaya, senior market analyst at LCG, in a note to clients.

She said the euro could struggle to “find buyers above the 1.20 mark,” and the post-election decline in the shared currency could extend towards the 50-day moving average of $1.1866.

The euro EURUSD, -0.3432%  fell to $1.1907 from $1.1948 late Friday. Against the pound, the GBPEUR, +0.6285%  euro also weakened, dropping to £1.1348, from £1.1295 in North American trading late Friday.

Read: Once German risk passes, China and the EU are waiting in the wings

The U.S. ICE Dollar Index DXY, +0.24%  , which measures the greenback against six rivals, was up 0.2% at 92.339. The WSJ U.S. Dollar Index BUXX, +0.20%  , which compares the dollar against a basket of 16 rival currencies, was up 0.11% at 85.62.

The dollar USDJPY, +0.19%  inched higher against the Japanese yen, trading at ¥112.29 from ¥111.99 in North American trading late Friday. Ozkardeskaya said the yen could remain under pressure after reports Japanese Prime Minister Shinzo Abe could call an out-of-cycle election on Oct. 22. Abe was reportedly expected to hold a news conference in Tokyo on Monday.

“The divergence between the Federal Reserve (Fed) and Bank of Japan (BoJ) policy outlooks and talks of a snap election in Japan play in favour of a further rise in USDJPY,” said the analyst.

See: 3 reasons the U.S. dollar’s strength versus the yen could be here to stay

Looking ahead, several Federal Reserve speakers are scheduled this week, following last week’s meeting in which the central bank announced it will begin to unwind its massive balance sheet in October. Among the highlights will be speeches from Fed Chairwoman Janet Yellen on Tuesday and Fed Vice Chair Stanley Fischer on Thursday.

For Monday, three Fed speakers are on tap: New York Fed President William Dudley at 8:30 a.m. Eastern Time, Chicago Fed President Charles Evans at 12:40 p.m. Eastern and Minneapolis Fed President Neel Kashkar at 6:30 p.m. Eastern.

Read: New era of uncertainty dawns in the stock market as Fed begins to taper QE

The pound GBPUSD, +0.2668%  firmed up against the dollar, rising to £1.3559 from £1.3495 in late trading on Friday. Moody’s Investors Service downgraded the U.K.’s credit rating on Friday, citing the impact of the country’s planned exit from the European Union.

The rating agency said the country’s public finances outlook has weakened significantly, “with the government’s fiscal consolidation plans increasingly in question and the debt burden expected to continue to rise.”