The euro slipped on Monday following the German election that saw Angela Merkel win a fourth term but with a worse-than-expected result as her party didn’t get enough votes to form a majority government.
The single European currency weakened against almost all its major peers. It was down 0.6 percent against the US dollar, trading at $1.1879 as of 14:40pm GMT. The euro was also down 0.6 percent against the British pound and 0.4 percent against the Japanese yen.
Analysts say the biggest problem for markets is political uncertainty as they react by selling the euro. Uncertainty may also throw into question European Central Bank plans to reduce monetary stimulus, a move which is likely to be announced at the ECB’s next meeting on October 26.
“There might be some concerns at the ECB that a less stable and less pro-EU German government will have negative implications for the (economic) outlook. That would be dovish,” Frederik Ducrozet, an economist at Pictet Wealth Management was cited as saying by Reuters.
According to experts, the decline is limited by what is still a strong European economy, but they warn the euro could see more wobbles until a government coalition is secured.
A survey showed on Monday that business confidence in Germany deteriorated unexpectedly in September, with the chief economist of the Ifo Economic Institute saying the election result could stoke further uncertainty.
“Market perception of highly predictable and stable German politics may be challenged,” analysts at Bank of America Merrill Lynch told the Quartz.
With 33 percent of the vote, Angela Merkel’s CDU/CSU alliance won a plurality in the German parliamentary elections. However, results showed record-low support for Germany’s major parties, while the third-placed anti-immigrant AfD became the first far-right party to enter parliament in more than half a century.