06:46 AM EST, 02/25/2025 (MT Newswires) -- EUR/USD hit an intra-day high of 1.0528 on Monday in response to Sunday's German parliamentary election result, which was just shy of the January intra-day high of 1.0533 but euro (EUR) momentum then reversed as optimism faded, said MUFG.

There are certainly positives to take from the victory for the CDU-CSU and its Friedrich Merz, wrote the bank in a note to clients. MUFG still argues that this victory certainly increases the prospect of a better policy-driven growth outlook later this year if Merz can follow through with his election manifesto that contains some pro-growth policies for Germany's industrial sector.

The CDU is aiming to lower corporate tax rates to improve corporate competitiveness and to simplify regulations to enhance a more business-friendly environment. The CDU also aims to reduce energy costs and create a better environment for start-ups via the creation of a "Start-up Protection Zone". However, the main focus for the financial markets is on the ability of the new government to alter or suspend the constitutional debt brake.

With BSW failing to achieve the 5% threshold it is now highly likely that the CDU-CSU can lead a smaller, simpler two-party coalition with the SPD, stated the bank. Friedrich Merz confirmed this Monday stating that given the seat composition of the Bundestag he was in a position to seek a "red-black coalition," adding that "this is precisely what we intend to do."

Merz confirmed that negotiations with the SPD were already in motion and that he would meet with outgoing Prime Minister Olaf Scholz in the coming days.

These developments certainly point to the prospects of the coalition negotiation period being less complicated and so could be completed by the timeline suggested by Merz -- by Easter, pointed out MUFG. It also can be argued that this CDU-SPD coalition which functioned well under Angela Merkel has certainly greater scope to deliver policy changes than under the gridlock of the SPD-led three-party coalition that was rife with division.

That could mean there is scope for agreeing on policies that could garner support from the Greens and/or the Left. Both the SPD and the Greens campaigned on relaxing fiscal rules that may open up a parliamentary deal. While the CDU, SPD, Greens and the Left have different priorities for fiscal easing, there is certainly scope for a deal that could allow for greater fiscal easing ahead.

Merz is also now considering taking action in the current parliament with a 200 billion fund for defense spending being considered. Time is limited though with the new parliament scheduled to sit on March 24. A speedy agreement that saw a considerable jump in defense spending would certainly help relations with the United States, added the bank.

So while MUFG can understand the retracement of the initial move higher in EUR/USD given there are numerous uncertainties, there remains reason to believe that over the medium term, there remain grounds to think that this change in government at least opens up the prospect of better impetus from economic policies that could lead to some improvement in optimism over the growth outlook that could prove EUR supportive.