06:56 AM EST, 02/24/2025 (MT Newswires) -- The fact that the German parliamentary election didn't produce a surprise outperformance by the far-right AfD party has been met with relief in the financial markets and the euro is the best-performing G10 currency early Monday following the victory for the CDU-CSU, said Mitsubishi UFG.

There had been speculation AfD might outperform its polls and win well over 20% of the vote on Sunday so the 20.8% share the party actually won is in line with recent polling rather than an outperformance, wrote the bank in a note to clients. The center-left SPD suffered its worst result since World War II while the Greens vote share also declined.

At the time of writing the MUFG note, both BSW and the FDP were below the 5% threshold meaning they won't have representation in parliament. However, it's very close for BSW with the current vote share at 4.97%.

With no seats for both these parties, Politico estimates a majority in parliament can be achieved with the CDU-CSU forming a coalition with the SPD. The parties are estimated to get a combined 328 seats in the 630-seat parliament. If BSW hits the threshold, a two-party coalition might not be possible, meaning a third party would be required for a working governing coalition, stated the bank.

Exit polls according to broadcaster ZDF revealed that immigration and security (44%) was the top concern amongst voters while the state of the economy (35%) was the next biggest concern.

The euro has advanced in part on the hope of a relatively quick negotiation period to form a government. If BSW falls short of the 5% threshold, that is certainly plausible though the situation becomes considerably more complicated if BSW enters parliament, added MUFG.

The euro has also gained on the hope of policies being introduced that allow for the suspension of the debt brake or revision of rules to boost spending in areas like defense. A suspension is more feasible in an emergency, but whether the Ukraine war and the need for defense spending qualify as an emergency is questionable. A change to the debt brake setup would require a two-thirds majority and that looks much more difficult given this election result, according to the bank.

Still, MUFG has argued that this election could be the catalyst for some positive momentum in terms of economic policies that help lift growth expectations later this year for better growth in 2026 and onwards. CDU leader Friedrich Merz is committed to a more pro-business policy agenda and if there is a relatively short coalition negotiation period followed by policies to boost growth, that could certainly be an important factor in the bank's forecast profile being realized later in the year with its year-end EUR/USD forecast of 1.0800 more "plausible."