Euro-Dollar Week Ahead Forecast: Aiming for the Stars as Biden Wins White House, but Upside Limited

-EUR/USD aims for stars after weekly close above resistances.
-Close above 1.1871 seen opening door for retest of 1.20 level.
-As Biden's victory weighs on USD, offers EU breathing space.
-But EU lockdown, ECB currency concerns keep EUR in check.

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• EUR/USD spot rate at time of writing: 1.1874
• Bank transfer rate (indicative guide): 1.1457-1.1541
• FX specialist providers (indicative guide): 1.1695-1.1766
• More information on FX specialist rates here

The Euro-to-Dollar rate closed its strongest week since July on Friday but with the Democratic Party's Joe Biden since declared the winner of last week's election the single currency could attempt to make further gains over the coming days, although some analysts sayits prospective upside is currently limited. 

Europe's single currency rose 1.95% against the Dollar last week while also advancing against many other major currencies as opposition candidate Joe Biden slowly but surely turned the tables on the incumbent President Donald Trump in a series of important swing states. Biden reportedly clinched as many as 290 electoral college votes, more than the 270 needed to win the presidency, but uncertainty remained over who would control the Senate ahead of January 05 run-off votes in the state of Georgia.

"Turnout this year was a record high, delivering more votes to Biden (some 75 million) than any president in history, and by a record 4.0-4.5 million margin over Trump’s," says Eric Nielsen, chief economist at Unicredit. "Trump received more than 70 million votes (which is three million more than he received four years ago, and more than Obama received in 2008 and 2012), which is a reminder of the huge number of Americans who see things very differently from the other half of their fellow Americans – and the vast majority of Europeans."

European Council President Charles Michel offered congratulations Sunday and said the EU "stands ready to engage with the elected President, new Congress and Administration" after President Donald Trump's earlier leads were washed away by postal votes in the days following Tuesday's election. 

President Trump has alleged this was not without illegal votes and is threatening legal action, although it's not clear whether he'll succeed in casting doubt over the result, much less in changing it. Nordea Markets research suggests he has until December 08 to make his case, after which the Electoral Count Act requires controversies over the vote to be resolved. 

"Compared to a Blue Wave outcome, we should expect less fiscal stimulus, a smaller current account deficit, a less inflationary stimulus (less redistribution towards high-MPC groups), meaning the Fed should be even more aggressive (lower for longer/more balance sheet growth). Lower-for-longer is good news for carry strategies (EM FX), and gold," says Martin Enlund, chief FX strategist at Nordea. "For what it’s worth, EUR/USD usually keeps rising from here on – at least according to the pattern from the US presidential elections since year 2000. The boring conclusion is that the 1.16-1.20 range holds until EM FX has risen enough for the ECB to relax on the 1.20 “cap." 

Above: EUR/USD climbs above 21 (blue), 55-day averages (orange) while Dollar Index (black line, left axis) slides.

The Dollar had been boosted and the Euro weighed down since early 2018 as the trade war between the U.S. and China stoked safe-haven demand. This was as best-in-class economic growth led to higher inflation and interest rates than prevailed elsewhere in the developed world, further burnishing the attractiveness of the Dollar.

But Biden's policy platform is the polar opposite of Donald Trump's and partly for this reason, is expected to act as a kind of balm for the global economic outlook and drag on the safe-haven Dollar. His friendlier stance toward the EU likely rules out the kind of trade conflict that Trump had threatened several times over the years, and he's also seen as likely to take the U.S. back into the Paris Climate Accord as well as the so-called Iranian nuclear deal - both seen in Brussels as major European achievements. 

Excitement over a return to the old global order lifted the Euro-to-Dollar rate back above the 1.18 handle last week, leading it to close Friday at 1.1874, above an important technical landmark which could signal that further gains are ahead. 

"This has eroded the 55 day ma and the short term downtrend at 1.1836 and a CLOSE above here would shift the neutral bias to a more positive one. A move above 1.1871 (21st September high) is needed to alleviate downside pressure and initiate recovery to 1.1971 and then 1.2014/15," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who's a buyer of the Euro from 1.1822.

Europe's single currency has a green light to advance further against the Dollar but could be sensitive in the coming days to whether or not U.S. and European stock markets can preserve last week's high single digit gains. If they succumb to profit-taking, perhaps over the contested election or prospect of a divided Congress, then the positively-correlated Euro might also be found in retreat. 

"We expect a bit more of an extension of recent trends (USD/CNH to breach 6.60, EUR/USD to rise and possibly breach 1.190, etc.). However, there are risks and  asymmetries in the near-term," says Jordan Rochester, a strategist at Nomura. "With a likely run-off in Georgia on 5 January 2021, uncertainty may remain. A surprise win by the Democrats for the 2 Georgia seats could see a negative impact on equities (taxes/regulations possibly back on the table)."

Above: Euro-to-Dollar rate at daily intervals with S&P 500 index futures (yellow line, left axis).

If risk assets and currencies avoid a wave of profit-taking this week, the Euro-to-Dollar rate could continue to climb, although the single currency won't have to go far before it reaches the 1.20 pain threshold of the European Central Bank (ECB), which has warned repeatedly since early September of risks posed to the economic recovery by currency strength. Rising exchange rates further reduce long-lost inflation pressures while stifling export competiveness. 

"EM FX currencies have performed strongly and if this continues then the trade-weighted EUR won’t necessarily gain if EUR/USD rises further – leaving the ECB less stressed out in coming months," Nordea's Enlund says. "Once authorities stop locking up their citizens, activity will likely pick up strongly. Right now however, the market is facing risks of more lockdowns rather than fewer." 

Europe's single currency has risen 5.8% against the Dollar this year and has remained near multi-year highs in recent weeks even as the continent's major economies were throw back into a renewed, albeit lesser form of 'lockdown' as authorities continue their largely fruitless attemps at containing the coronavirus.

New lockdowns are likely to send the Eurozone back into contraction this quarter, rendering Friday's third-quarter GDP data a non-event for the Euro. Eurozone GDP is expected to have rebounded 12.7%, matching the second quarter decline but still leaving output below its pre-pandemic level.

"We think that [indiustrial] output increased again in October, as the manufacturing sector continued its recovery in the fourth quarter even as much of the hospitality sector closed," says Melanie Debono at Capital Economics. "We will keep a close eye on the ECB’s Forum on Central Banking for signals on forthcoming policy changes. Meanwhile, we do not expect major revisions to euro-zone Q3 GDP, although the second wave of cases in Europe means that we now expect the recovery to reverse in Q4." 

Currently economists anticipate the nascent shutdown will last only for November, which is seen enabling a rapid growth rebound next year, although if tightened restrictions remain in place for longer then contraction could grow and it's far from certain the Euro could remain immune to the economic fallout. 

The data is due out at 10:00 London time on Friday although before then investors will listen closely to a 09:25 speech from ECB President Christine Lagare, who's set to address the Green Horizon Summit hosted by the City of London Corporation and Green Finance Institute. Lagarde told markets last month the ECB would be adjusting all of its monetary policy settings in December as it seeks to provide whaterve support it can to the Eurozone economy as navigates ongoing coronavirus-related disruption. 

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