Euro-Dollar Rate Weighed Down by Softer Sterling and Tariff Fears

Image © European Union 2018 - European Parliament, Reproduced Under CC Licensing.

- EUR softens with GBP after Brexit timetable scuppered. 

- UK election risks are rising, weighing on GBP and EUR.

- UBS says 1.1055 level and Thursday PMIs key to outlook.

- BMO says USD and Brexit progress offer support to EUR.

- Says melting USD may lift EUR but sellers will soon return.

The Euro softened in sympathy with Pound Sterling Wednesday after the fortnight long rally by the British currency came to an end in tandem with voting in the UK parliament, athough Europe's unified unit is said by some to be at risk of further losses heading toward the weekend. 

MPs in the House of Commons backed Prime Minister Boris Johnson's Brexit proposals in a vote late on Tuesday evening but rejected his preferred parliamentary timetable in a ballot that's left him looking to Brussels for a third Brexit delay while warning that he intends to push for a general election. Johnson has sought an election repeatedly in recent weeks although with the European Council contemplating the length of an Article 50 extension, the prospect of one happening is becoming real. 

Meanwhile, U.S. Commerce Secretary Wilbur Ross revealed in an interview published Wednesday by the FT that the White House may further extend an existing delay to new tariffs that are due to be imposed on European car exports to the U.S. President Donald Trump delayed the tariffs for 180 days in May although the reprieve is due to expire in the middle of November. The comments are a fresh reminder that the U.S.-China tariff fight is simply one of many fronts in a broader and global trade campaign.

Sterling is comfortably the best performing major currency of October following an eight day rally that took the British unit into the Monday close, after PM Johnson returned from Brussels proclaiming a new deal with the EU that will "get Brexit done". The agreement has further reduced the risk of a 'no deal' Brexit, which had already been in retreat since the passing of the 'Benn Act', and offered some form of limited visibility to markets on what the next year could look like if Johnson's proposal is passed. 

Europe is less exposed to the UK economy than the Brexiting economy is to trade with its European neighbour, but the Eurozone is less able to cope with as well as recover from economic crises, and is a much larger and therefore slower vehicle to turn. This means the averting of a potentially damaging 'no deal' Brexit is a positive for the single currency as well as for Sterling, although similar is true with an election, which throws up a series of new risks to the Pound. 

"The ECB meeting tomorrow is expected to be a non-event, so the focus will be on European PMI data in the morning. A pick up in data is needed for a sustained rally in the euro. EURUSD support at 1.1115, 1.1090 and 1.1055; resistance at 1.1130, 1.1170 and 1.1210," Laubscher says. 

Laubscher is eyeing the IHS Markit PMI surveys due for release on Thursday are the next big event for the Euro because those are exactly the kind of surveys that will need to pick up if the Euro is to be able to sustain any upward move for a meaningful period. Consensus is looking for the all-important manufacturing PMI indices to stabilise in October after months of declines, which might be positive for the Euro, although the surveys have repeatedly disappointed the market this year.

Others are mindful of upside risks around the single currency on Thursday.  

Above: Euro-to-Dollar rate shown at daily intervals alongside Pound-to-Dollar rate (orange line, left axis).

"Given the high importance of the USD and Brexit factors in the current EURUSD dynamic, we are very reluctant to take a view on the currency pair heading into Thursday and we are basically "neutral" for the time being," says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

Gallo says the direction of the Dollar and the length of the looming Article 50 extension will be key to the trajectory of the Euro and Sterling in the weeks ahead. He anticipates that investors will continue to walk away from earlier bets on a rising Dollar, which could continue to lift the Pound and Euro by default over the coming weeks, although he has a bearish outlook on the single currency over the medium-to-long term. 

A long article 50 extension that runs beyond the end of January 2020 could see the Dollar become the major driver of the Pound and Euro again, with Brexit falling by the wayside, although any short extension would see the risk of both a 'no deal' Brexit as well as an orderly Brexit on a renewed rise. In short, a shorter extension would almost certainly mean an increase in volatility and continued Brexit focus for the Euro and Sterling. 

"The unwind of long-USD positions heading into calendar year-end and Brexit-related developments are putting a solid floor underneath EURUSD," Gallo says. "All in all, EURUSD risks appear to be evenly balanced heading into Thursday, but beyond that point we get the impression that the cleanse on USD long positions has not entirely run its course just yet. We would really like to see levels in excess of 1.1200 before looking to sell the pair."

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of a specialist foreign exchange specialist. A payments provider can deliver you an exchange rate closer to the real market rate than your bank would, thereby saving you substantial quantities of currency. Find out more here.

* Advertisement