The reaction from financial markets is unequivocal on the new German government proposal to lift the debt brake and spending as much as 500 billion euros on infrastructure. Germany is one of the few countries left in the world with an enviable fiscal position but it’s also struggling with high energy prices, security worries and a loss of competitiveness in manufacturing.

That’s led to a rise in the far right and in response the traditional centrist parties look like they will band together on a spending spree. German bund yields are up 31 basis points today to 2.78% and the DAX is up 3.6%.

Similarly, the euro is surging, with a 139 pip rally to 1.0762 after a similar rally yestrerday.

Deutche Bank called the government move the “biggest and fastest fiscal policy shift in post-unification German history” and raised its euro target to 1.10 ‘for now’.

“The newsflow is significant enough to now shift us into an outright EUR/USD bullish view,” they wrote while similarly highlighting that the US is experiencing contractionary fiscal headwinds.

Critically, the new spending goes well beyond just military spending.

“We have long been stressing the likely limited growth impact of defence spending on European growth. The broadening out of the German fiscal package but more importantly the speed and the ‘whatever it takes’ nature of the policy response have the capacity to create more front-loaded support via both sentiment and spending effects as well.”

Finally, they fret that the US dollar is losing its safe haven status.

The risk right now is that they don’t get the proposals through parliament or water them down. That will be an area of focus in the weeks ahead.

This article was written by Adam Button at www.forexlive.com.