Euro-Dollar Week Ahead Forecast: Strength Ebbs as U.S. Election Nears, Virus Spreads and Risk Grows

Modified: Sunday, 18 October 2020 17:53 BST
Written by: James Skinner

-EUR/USD vulnerability growing as virus spreads, U.S. election nears.
-Restrictions handicap Eurozone economy in transatlantic growth race.
-As analyst community begins to second guess U.S. election outlook.

Image © European Central Bank

EUR/USD spot rate at time of writing: 1.1712
Bank transfer rate (indicative guide): 1.1291-1.1372
FX specialist providers (indicative guide): 1.1525-1.1604
More information on FX specialist rates here

The Euro unravelled half of October’s gains last week and could increasingly struggle to keep the Dollar under wraps in the coming days as the U.S. election nears, the coronavirus spreads again on the old continent and as investors second-guess the growth outlook into year-end.

Europe’s single currency suffered a setback last week when it declined almost a full percent against the Dollar and could be likely to wrack up further losses this week as analyst sentiment turns bearish and the market cautious amid mounting headwinds for risk assets and a loss of momentum for Democratic Party candidate Joe Biden in U.S. election opinion polls.

But if Europe’s unified unit is to sink it might not be without putting up a fight first, during which it might be able to count on the Chinese Yuan for assistance on Monday if economists are right about the world’s second largest economy having garnered further recovery momentum during the third quarter.

"While the first half of 2020 saw sharp declines in Chinese imports (with China the first country to be hit by the pandemic), things have started to look up for German, French and Italian exports to China in recent months and especially in September. China’s imports from UK, however, have still not registered positive growth, even though they continue to improve," says Giovanni Zanni, chief Euro area economist at Natwest Markets.

Consensus looks for Chinese GDP growth to have risen from an annualised 3.2% in the second quarter, to 5.5% for last quarter when the data is released at 03:00 London time on Monday, which could offer support to the Euro given its sensitivity to the Yuan and sizeable trade flows between the EU and China.

But once beyond Monday there’s a chance the market might become a somewhat inhospitable place for the Euro.

Above: Euro-to-Dollar rate shown at daily intervals with S&P 500 (blue line, left axis) and CNH/USD (black line, left axis).

“The twin risks of a close, drawn-out election and a surprise re-election of President Donald Trump could challenge the market consensus for a decisive Democratic win as we move closer to the vote,” says Valentin Marinov, head of FX strategy at Credit Agricole CIB. “This should support the USD, especially if the 22 October presidential debate boosts the President’s standing.”

Investors have come close to pricing-out any prospect of a victory for President Donald Trump in the November 03 election, having favoured Democratic Party candidate Joe Biden while being egged on by opinion polls that moved further and further in favour of the opposition candidate until last week. The incumbent may now be closing the gap with his rival.

Polls were an unreliable guide to U.S. electoral sentiment in 2016 and this inconvenient reality may not remain lost on investors for much longer, especially as the vote draws nearer. If any resulting unease among investors leads to a paring back of bets against the Dollar, then the Euro-to-Dollar rate could be among the first to reflect such caution given that it’s been one of the more significant beneficiaries of bearish wagers against the U.S. currency.

This could mean the Euro is sensitive to fluctuations in polls following Thursday’s televised debate between President Trump and Joe Biden at Belmont University in Nashville, Tennessee.

"If forced to come up with a near-term view for the EUR/USD we’d prefer to be short over the next couple of weeks (for a possible move towards 1.1450-1.15)," says Martin Enlund, chief FX strategist at Nordea Markets.

Above: Euro-to-Dollar rate shown at weekly intervals alongside Dollar Index (black line, left axis).

The opposition candidate was perceived by pollsters and the market as the victor of the last debate, but has since been mired in scandal over his son’s business dealings in Ukraine and China, which could have implications for his perceived suitability as a candidate.

“The COVID-19 headlines remain troubling but have not generally captured the EUR’s attention. Germany and France reported another record day for new COVID-19 infections. Spain posted its largest increase since April. The FX indifference may be because the COVID-19 surge is not yet translating into any sense of immediacy for ECB action,” says Dragh Maher, U.S. head of FX strategy at HSBC.

With the U.S. election and opinion polls aside, Europe has recently been submerged beneath a second wave of coronavirus infections that have drawn tightened restrictions from governments that are now threatening the continent’s economic recovery. This year’s Euro-to-Dollar rally was built initially on foundations that had the words “economic outperformance” inscribed into them.

“Over the past week, intraday and daily trend strength signals have developed a more bearish feel and we think the EUR is poised to extend towards a retest of the September low at 1.1613, now key short-term support, shortly. We think corrective losses might extend to the 1.15 area in the next few weeks and anticipate the EUR staying better offered through year end,” says Juan Manuel Herrera, a strategist at Scotiabank.

The popular narrative was that a botched coronavirus containment would leave the U.S. susceptible to underperformance in the year ahead, while Europe enjoyed a renaissance witha more effective containment enabling it to recover while being bolstered by the EU's coronavirus recovery fund from 2021.

Above: Dollar Index shown at daily intervals alongside S&P 500 index futures (blue line, left axis).

“EUR/USD is on the defensive. The market has eroded initial support at 1.1695, intraday Elliott wave counts remain negative and this suggests further losses to the recent low at 1.1612. Below 1.1612 would target the 1.1495 March high, which if seen, is expected to hold,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

The more that Europe’s second wave swells the less sustainable an economic outperformance will become, especially if European governments continue to favour ‘lockdown’ strategies in order to contain the virus.

So far restrictions have been milder than those seen earlier in the year, although national leaders and other lawmakers have continued to threaten harsher measures if the infection continues to spread.

With virus cases aside, the U.S. election and Chinese GDP figures aside, the could take its cues in the final session of the week from IHS Markit PMI surveys of the manufacturing and services sectors. Consensus looks for modest declines in both indices, with the services PMI seen falling from 48.0 to 47.1 while manufacturing declines from 53.7 to 53.0, although recent coronavirus developments could mean the risks are all slanted to the downside.

The data is due out between 08:15 am and 10:00 on Friday and could be a source of upset for the Euro ahead of the weekend if the single currency is able to get through the rest of the week without coming undone again.

“The ECB’s Lagarde will be speaking, however it’s hard to see how this will shape the market’s view on the EUR given that near-term growth risks are more prominent,” says Daniel Been, head of FX research at ANZ. “Given the euro area’s high beta to global trade, we expect more global uncertainty around the pandemic to keep any upside capped.”