Euro at Best Level Since October Heading Into Key German Vote

Photographer: Marc Beckmann. Source: German Bundestag.

Euro can find further support if the spending package passes Germany's lower house say analysts.

The Euro has reached its best level of exchange against the Dollar and Pound since October ahead of a vote in Germany's Bundestag to alter the country's constitution and allow the government to borrow more money to invest in infrastructure and defence.

"There’s a lot riding on this morning’s German Bundestag vote on the fiscal package that future Chancellor Merz has put together," says Kit Juckes, FX analyst at Société Générale.

Friedrich Merz's CDU/CSU, SPD and Greens will unite to deliver the three-quarters majority needed to alter the constitution.

Analysts say reforming Germany's long-standing 'debt brake' will allow the country to invest as much as €1 trillion over the next decade.

"We upgrade our German growth forecast materially via higher public spending on defence and infrastructure," says Sven Jari Stehn, an economist at Goldman Sachs.

Ahead of the vote the Euro is seeing another pulse of buying that allows it to extend its 2025 rally: Euro-Pound is at 0.8426, taking the best rate for those buying pounds to 0.8397.

Euro-Dollar at 1.0948, taking the best level for dollar buyers to 1.0905.

There are some risks, as Juckes says the expectation for a comfortable majority will allow some politicians to peel away and vote against it.

"But even so, moving the proposal forward to the Bundesrat could still help the EUR," says Juckes.

"EUR/USD is at its best level since early October this morning, possibly helped by EUR/JPY as higher US yields overnight pushed USD/JPY closer to 150. It’s now expensive relative to the 2-year rate differential it has tracked in recent years, and that probably says something about positioning," he adds.

Above: EUR/GBP and EUR/USD (bottom) at daily intervals.

Key Components of the Plan:

Defence Spending: The proposal seeks to allocate funds exceeding 1% of Germany's Gross Domestic Product (GDP) to defence, intelligence, and aid to Ukraine. ​

Infrastructure Investment: A €500 billion infrastructure fund is included to modernise the country's infrastructure and stimulate economic growth, with €100 billion earmarked for climate protection and economic transformation initiatives. ​

Debt Rule Amendment: To facilitate this spending surge, the plan proposes relaxing the constitutionally enshrined debt brake, allowing for increased borrowing beyond current limits.

Merz, leader of the conservative Christian Democrats (CDU) and Germany's likely next chancellor, is spearheading the initiative. The proposal has garnered support from the Social Democrats (SPD) and the Greens, who, after negotiations, agreed to back the plan in exchange for dedicated funding toward climate and economic measures

The main parties hold about 70% of the votes in the lower house, which means they will easily pass the two-thirds majority required.

Friday sees the legislation move to the upper house, the Bundesrat, which has a more complex setup that involves state-level leaders. Again, most analysts think the bill will pass.