Germany’s pension reform looks set to pass after Die Linke signals abstention, giving Euro (EUR) a temporary boost against the Pound Sterling (GBP). Despite this parliamentary relief, slow structural reforms and a narrow coalition majority limit EUR/GBP upside, with gradual gains expected into next year, Rabobank's FX analyst Jane Foley reports.

Merz avoids parliamentary defeat on key vote

"While GBP is faced with BoE rate cuts, slow growth and the potential of political headwinds, the outlook for the EUR could be tempered by disappointment. While the single currency is likely to find support from the view that the ECB may have already finished its rate cutting cycle, EUR bulls could grow impatient waiting for structural reforms to take effect in Germany."

"That said, today has brought some good news for the EUR. Reports suggest that Germany’s far-left Die Linke party is set to abstain from a vote on pension reform which should allow the package to pass a vote in parliament. The news follows a rebellion from within Chancellor Merz’s own conservative bloc by eighteen lawmakers who have argued that the current pension benefits are not sustainable. If the pension reforms fail, this would have been viewed as an embarrassing defeat for Merz which would further weak his authority."

"Merz’s coalition only has a narrow twelve vote parliamentary majority. While a success for Merz’s reform this week could bring some relief, various industry voices in Germany have raised concerns about the slow pace of structural reform. On balance, we are forecasting only a very slow upwards creep in EUR/GBP into next year to a 6-12-month forecast of 0.89."