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Political betting markets continue to show a 'grand coalition' between the centre-right Christian Democratic Union (CDU) and the centre-left Social Democrats (SPD) as the most likely election outcome. Data from Polymarket assigns a 54% implied probability that the two will form the next gov't after the 23 Feb federal election. In something of a shift, Polymarket now shows a 'Germany' coalition formed by the CDU, SPD and pro-business liberal Free Democrats (FDP) as the second-most likely coalition formation with a 17% implied probability, ahead of the 'Kenya' coalition of the CDU, SPD and Greens with a 16% implied probability and a 'Kiwi' coalition of the CDU and Greens on just 4.9%.
Chart 1. Betting Market Implied Probability 'Which coalition will form the next German government?', %
Source: Polymarket
ERM5 options volumes have picked up today, after more subdued activity the prior three sessions. Volumes tilt heavily in favour of calls (~170k at typing versus 73k of puts), with dovish structures particularly prevalent this afternoon. This is potentially in response to the pullback in underlying futures prices (-4.0 ticks today at 97.790) following ECB Executive Board member Schnabel’s hawkish interview with the FT earlier. However, M5 options activity this month has still been notably more moderate than in January.