- Citi expect EUR/USD to remain supported

- German election seen as broadly supportive

- SPD remain favourites to win

Above: File image of the SPD's Olaf Scholz, Image: Deutsche Bundesbank

EUR/USD reference rates at publication:Spot: 1.1824Bank transfers (indicative guide): 1.1409-1.1492Money transfer specialist rates (indicative): 1.1717-1.1765More information on securing specialist rates, hereSet up an exchange rate alert, hereThe Euro-to-Dollar exchange rate (EUR/USD) is likely to remain supported through the German election and subsequent coalition negotiations, according to analysis from one of the world's largest foreign exchange dealers.

Citi say their research finds German elections to be typically supportive of the Euro, although any resolutely left-wing coalition could yield greater volatility in exchange rates than has been the case previously.

Germany will vote for a new parliament and Chancellor Angela Merkel's replacement on September 26.

Voting day itself will unlikely offer any material interest to foreign exchange markets, rather the resultant negotiations to form a government in the coming days and weeks will be of interest.

"We are biased upwards for EUR/USD over time including for the 26 September German election and into year-end," says Ebrahim Rahbari, Chief G10 Currency Strategist at Citibank.

Ahead of the vote Euro exchange markets appear relatively sanguine towards the outcome, suggesting any significant shift in course for German policy is remote.

However, any left-leaning coalition could well result in greater government spending which might in turn be stimulative to the German, and indeed the wider European, economy.

Some analysts say this could be a supportive outcome for the Euro.

Above: German polling aggregate from The Telegraph.

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Based on an average of the polls, the centre-left Social Democrat Party (SPD) looks set to gain the most votes with a 25% vote share in the polls.

The Social Democrat (SPD) candidate to become Germany's next chancellor, Olaf Scholz, beat his conservative rival in a primetime TV debate on Sunday, a snap poll showed.

A snap poll for ARD television taken soon after the 90 minute debate showed that 41% of those asked thought Scholz was the most convincing performer, compared to 27% for Armin Laschet of the CDU/CSU and 25% for the Greens candidate, Annalena Baerbock.

A SDP / Green coalition looks likely but Citi economists think it may be very difficult to form a coalition if such a left-wing alliance is ruled out.

Other options to shore up a SDP-lead coalition could include the liberal FDP party who are socially in tune with the SDP but more fiscally conservative in their preference for free markets.

The FDP's tax policies could however prove a stumbling bloc with the Greens’ and SPD’s redistribution and public investment plans.

See also: Nomura Bulk up on Euro-Dollar Exposure on German Election Outcome

For foreign exchange markets, a bigger surprise would come if the SDP were to include the far-left Die Linke party; Citi say this could result in a coalition which delivers "a major break from past policy".

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"The chances for a “Kenya coalition” of the CDU/CSU, Green and FDP might be underestimated on the other hand," says Rahbari.

"We think the rising fiscal prospect will support EURUSD going into the election in principle," he adds.

When looking at previous German elections (eight elections over 1990-2017), Citi discovered that EUR/USD tends to rise into a German election.

Their data shows the mean and median of EUR/USD return in the 10 trading days going into a German election are around 0.4% and 0.1% respectively, while the appreciation tends to continue over the 10 trading days after the election, with mean and median return reaching 0.6% and 0.7% respectively.

Image courtesy of Citi.

Beyond the German elections Citi see limited downside potential in the EUR/USD as the European Central Bank (ECB) has effectively joinEd the tapering club.

"This limits any impact of Fed tapering on EUR/USD going forward, therefore reducing the durability of any hawkish impact of US CPI print and the September FOMC – after all, if the ECB is tapering, too, the impact of Fed tapering should decline even more," says Rahbari.