Germany’s election fallout: A gift to the AfD, a weak CDU, and a policy trainwreck in the making

Call it what it is—today’s election is a disaster for Germany. The CDU underperformed and now heads into coalition talks wounded and compromised, while the SPD and Greens—who actively sabotaged the CDU’s push to tighten immigration—come out with just enough leverage to dictate the next government’s direction.

And the only real winner? The AfD.

This election was supposed to contain the far-right surge, yet the mainstream parties have done everything but that. The CDU tried to reclaim ground by tightening immigration laws before the vote, only to get undermined by the SPD and Greens, who played a deeply cynical political brinkmanship that ultimately handed the AfD more fuel for their fire. Now, the CDU heads into coalition talks weaker than before, and the AfD walks away with even more momentum for the next election.

With these results, the next government’s first priority won’t be fixing Germany’s stagnating economy—it’ll be damage control. Expect a hard pivot toward stricter immigration policies, not because of economic necessity but because mainstream parties are now in full-blown panic mode over the AfD’s rise.

Meanwhile, Germany’s real problems—its economic slowdown, lagging industrial competitiveness, and lack of investment incentives—will take a backseat. Instead of much-needed pro-growth policies, structural reforms, and supply-side fixes, the government will likely waste its political capital trying to curb AfD’s influence rather than addressing the root causes of voter frustration.

If this government stumbles, the stakes will only get higher. The AfD is playing the long game, and if the next coalition fails to deliver tangible economic improvements, their support will only grow stronger.

And here’s the brutal truth: Containing the AfD isn’t the same as fixing Germany. Unless real solutions are put forward—not just reactionary policies aimed at damage control—this election won’t be a reset. It’ll be a warning shot for an even bigger political shakeup down the road.

Why the euro is rallying right now is anyone’s guess—because, on the surface, there’s no obvious reason for it. Maybe I’m missing something, but the fundamental backdrop isn’t exactly screaming bullish for the single currency.

The euro’s latest rally feels like a mystery wrapped in market noise, but if we break it down, a few potential drivers emerge. The most obvious explanation? Short covering. Markets may be pricing out extreme tail risks following Germany’s election, even though the CDU is weakened and coalition talks are far from smooth sailing. Another theory is that flows into Eastern European assets on a perceived détente are filtering back into the euro. While geopolitical de-escalation could provide a short-term boost, it’s unlikely to be the kind of fundamental game-changer that drives a sustained rally.

A more likely culprit? A positioning squeeze. Traders may have leaned too hard on euro shorts, and we’re now seeing a mechanical unwind rather than a true shift in sentiment. If that’s the case, this rally won’t have legs—because the macro backdrop hasn’t changed. Growth remains weak, inflation is stuck in an uncomfortable middle ground, and the ECB isn’t in any position to support the Euro

Then there’s the bigger picture—looming trade wars. And this time, Europe is right in the crosshairs. This isn’t just about tariffs or economic policy; the ideological gap between the U.S. and Europe is widening, setting the stage for a deeper geopolitical and economic rift. If anything, the euro should be pricing in more downside risk, not rallying.

For now, this move feels like a technical shakeout rather than a structural shift. If the bond market and real money flows start confirming the rally, that’s a different story. But until then, this looks like a trade, not a trend.

For now, we will let the relief rally play out, and if it extends through London and into New York, we will start shorting the afternoon New York session. But ready to jump if European flows start fading this move.