Euro-Dollar Rate Forecast to Fall as far as 1.14

Modified: Friday, 06 November 2020 10:41 GMT

- BofA are shorting the Euro
- Rabobank's Foley says "the shine" is coming off Euro
- Technical studies confirm charts are pointing to a move lower

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A number of foreign exchange analysts have come forward with a view the Euro can fall back further against the Dollar based on technical observations of the charts, a fundamental view that the Euro will be undermined by a Eurozone economic contraction and that the Dollar will stand to benefit from a lengthy dispute over the U.S. election result.

"Without a blue wave in Washington it is possible that the bickering over the size of stimulus could continue this side of the election. The combination of political uncertainty, delays to stimulus combined with the surge in Covid-19 cases in the US and in Europe all point to a decline in risk appetite and that backdrop suggests that the safe haven USD will find support," says Jane Foley, Senior FX Strategist at Rabobank.

The call by Foley comes in a week that has seen a 1.40% rally in the value of the Euro against the Dollar, a move that is sympathetic with a broader rally in stock markets which in turn betrays an improvement in investor sentiment.

The Euro-to-Dollar exchange rate has risen to 1.1830 at the time of writing, but had gone as high as 1.1859 earlier on Thursday.

"At least the market has a narrative: A Democrat President who doesn't control the Senate, will be less combative on trade, but will be more limited where fiscal policy is concerned. This leaves a bigger role for the Federal Reserve, which means even lower rates for longer, even more QE for longer. So the dollar is weaker, spreads are tight, equities have rallied around the world this week and volatility is (even) lower than it was," says Kit Juckes, foreign exchange strategist at Société Générale.

Stock markets have risen and the Dollar retreated following the close of polls in the U.S. and the release of results which point to the prospect of a contested result; a counterintuitive reaction by investors to what could be an ugly few days or weeks.

Foreign exchange strategists at Bank of America (BofA) have nevertheless adopted a short position on EUR/USD in anticipation of a more traditional 'risk off' dynamic eventually taking hold.

"We do not believe markets are prepared for potential heightened social and political tension, increased economic policy uncertainty and fiscal policy paralysis when 20 million Americans still require jobless benefits that have either expired or are about to. To hedge this risk, we like short euro," says Kamal Sharma, FX Strategist at BofA.

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Ahead of the vote, a popular narrative amongst investors was the Dollar faced a period of long-term decline should the polls prove correct and the Democrats sweep the White House and Congress. This was an assumption largely build on a view that the Democrats would have full control over tax and spending powers, thereby allowing them to deliver a generous package of fiscal support.

This would in turn boost stocks and weight on the Dollar. "Any change that raises the odds of a 'blue wave' scenario — where former Vice President Biden wins the presidency and Democrats also take the Senate — should accelerate U.S. Dollar weakness," said analyst Zach Pandl at Goldman Sachs in New York ahead of the election.

But, with the Republicans closing in on the 50 seats required to control the Senate at the time of publication this blue wave outcome looks unlikely.

Rabobank are forecasting the Euro-Dollar exchange rate to be trading at 1.16 in three months and 1.14 in six months, partly on the view that once the electoral uncertainty fades the reality of a split Congress will prove largely supportive of the Dollar.

The conditions for a stronger Dollar in the near-term meanwhile appear to be growing as at the time of publication Trump’s campaign has said it would launch legal challenges in Wisconsin, Michigan, Arizona, Georgia and Pennsylvania, suggesting the potential for a drawn-out legal process that will ultimately decide the winner.

"We think that the move higher in risk assets may prove short-lived. The results in some of the remaining key states may not be available until Friday, notably Pennsylvania, so it may still be a few days before the final result is known. A much greater risk to the market is that Trump has repeatedly stated his view that voter fraud has taken place and that he would be launching a legal challenge in order to contest the vote," says Matthew Ryan, Senior Market Analyst, Ebury.

The short position on EUR/USD adopted by BofA does however also reflect a view the Euro will be weighed down by Eurozone economic underperformance over coming weeks.

"The market remains long EUR, as the Eurozone data is about to worsen following another lockdown. We have been particularly concerned about a long EURUSD real money position, which is historically stretched. Following the sharp increase in Covid infections since the summer reopening, an increasing number of European countries are now moving back to a partial or even complete lockdown," says Sharma.

Economist at BofA are expecting a weaker fourth quarter performance in the Eurozone which should lead to a widening underperformance gap relative to the United States.

"The shine has been coming off the EUR," says Foley. "The market built very long EUR positions in the spring and summer on optimism that the EU was taking a small step towards fiscal unity with its Recovery Fund and on the efforts of the ECB to stamp out any talk of fragmentation within the Eurozone. By the time the Recovery Fund was launched in July, the EUR was also being supported by the perception that the epicentre of Covid19 had shifted to the other side of the Atlantic."

The EU Commission on Thursday cut its 2021 Euro Area growth forecasts to 4.2% from 6.1% previously in their Autumn European Economic Forecast update, which also shows they expect debt to remain at 100% of GDP until 2022.

The Commission warned of rising economic uncertainty as a result of a resurgent covid-19 virus and called on EU member states to prioritise putting in motion the historic rescue fund agreed earlier this year.

Bank of America's short trade on EUR/USD is targeting 1.15 over a two month timeframe, a target partly derived from a technical deterioration in the charts.

"We see a path lower in euro to the 1.1490/1.1550 area while below the Sept 10th high of 1.1917," says Paul Ciana, a technical analyst at BofA.

"A 335 corrective wave pattern has formed. The 200d SMA is still rising however will begin to flatten near 1.14 in a spot decline offering another support levels," says Ciana.