EUR/USD surges as US Dollar tumbles ahead of US election day, Fed meeting
- EUR/USD climbs to near 1.0900 as the US Dollar faces intense selling pressure ahead of the US presidential election and the Fed’s policy announcement.
- The latest polls have shown Harris having a slight advantage over Trump.
- The Fed is expected to cut interest rates again on Thursday, but at a slower pace than the 50 bps trim it delivered in September.
EUR/USD jumps around the key resistance of 1.0900 in Monday’s European session. The major currency pair surges at the US Dollar’s (USD) expense amid increasing uncertainty ahead of the United States (US) presidential election on Tuesday and the Federal Reserve’s (Fed) monetary policy meeting on Thursday.
The US Dollar has started the week on a bearish note, with the US Dollar Index (DXY) declining below 103.70 as market participants expect a neck-to-neck competition between former President Donald Trump and current Vice President Kamala Harris.
The sharp sell-off in the US Dollar came after the release of the Des Moines Register/Mediacom Iowa Poll, which showed Harris up three points on Trump in the state, Reuters reported. The poll’s result marks a turnaround from September in a state that Trump won clearly both in 2016 and 2020.
Traders see a Trump victory as positive for the US Dollar and Treasury yields as he has vowed to raise tariffs on imports and lower taxes, measures that would likely boost inflationary pressures and force the Fed to return to a restrictive policy stance. On the contrary, a Harris win is perceived to be a continuation of current government policies, which traders interpret as beneficial for risk-sensitive currencies.
Meanwhile, the Fed is set to meet on Thursday to decide about interest rates. The meeting, however, is likely to be overshadowed by the US election outcome and also by the fact that traders have fully priced in a rate reduction of 25 basis points (bps), which would push key borrowing rates lower to 4.50%-4.75%, according to the CME Fedwatch tool.
Still, investors will pay close attention to the guidance for monetary policy action for the last meeting of this year to be held in December. Markets also expect that the Fed will cut interest rates by 25 basis points (bps) next month.
On the economic data front, investors will focus on the US ISM Services Purchasing Managers’ Index (PMI) data for October, which will be published on Tuesday. The Services PMI is estimated to come in at 53.5, lower than 54.9 in September, suggesting that the index continues to expand but at a slower pace.
Daily digest market movers: EUR/USD gains on multiple tailwinds
- The strength in the EUR/USD pair is also backed by an upbeat Euro (EUR), which performs strongly since last week after a slew of Eurozone economic data diminished expectations of the European Central Bank (ECB) delivering large rate cuts in December.
- The Eurostat reported that the Eurozone economy expanded at a faster-than-expected pace in the third quarter of the year. Upbeat Eurozone Gross Domestic Product (GDP) data forced trades to pare bets supporting a larger-than-usual interest rate cut of 50 bps in the policy meeting next month.
- Meanwhile, inflationary pressures in the Eurozone accelerated to 2% in October, according to the flash estimate, also weighing on the ECB's big rate cut bets.
- In Monday’s session, investors will focus on the final HCOB Manufacturing PMI data for October from Germany and the overall Eurozone as well as the November Sentix Investors Confidence data. Apart from that, the speech from ECB policymaker and President of the Bundesbank Joachin Nagel will be on investors’ radar for fresh guidance on interest rates.
Technical Analysis: EUR/USD sees more upside above 1.0900
EUR/USD strives to extend its upside above the key resistance of 1.0900, which also aligns with the 200-day Exponential Moving Average (EMA). The pair rebounded sharply after gaining a firm footing near the upward-sloping trendline around 1.0750, which is plotted from the April 16 low at around 1.0600.
The 14-day Relative Strength Index (RSI) climbs to near 50.00, suggesting that the bearish momentum is fading.
Looking up, the shared currency pair could rise to near the September 11 low around 1.1000 after breaking above the 200-day EMA around 1.0900. On the downside, the October 23 low of 1.0760 will be the key support area for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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