The EUR/USD Rate Remains Positively Poised Following Trump-Clinton Debate, But Busy US Data Calander Lies Ahead
Our technical studies continue to anticipate a move higher in EUR/USD however the pair has given back some of the gains realised following the Clinton-Trump debate.
The EUR/USD is seen at 1.1238 on Tuesday - more or less where it was 24 hours earlier.
The pair had risen in the wake of the first US presidential debate which boost global stocks and hurt the safe-haven Dollar after it appeared Clinton outshone Trump.
Betting markets indicate an increase in the probability of a Clinton victory from around 60% before the debate to close to 70% after the debate. Furthermore, a poll by CNN found that 62% of viewers felt Clinton won.
Markets are clearly on Clinton's side and therefore the Dollar may remain subdued until such a time Trump claws back ground.
"The foreign exchange market reacted sharply to yesterday’s first US presidential debate. Emerging market currencies were broadly better bid, especially the Mexican peso but it was the Canadian dollar, which appreciated the most as experts concurred that Hillary Clinton had won this first round," says Arnaud Masset at Swissquote Bank following the event.
The broad-based US Dollar weakness allowed EUR/USD to peak at 1.1279, the highest level since mid-September.
The pair has since retraced these gains by falling back to 1.1238, nevertheless the pair remains supported in our opinion.
From a technical standpoint, the standout observation from the charts is the double whammy of support offered by the combination of the 50 and 200-day moving averages at 1.11.
A break above the 1.1329 highs over coming days would be critical to solidifying the growing bullish case.
Such a move would probably confirm a continuation to the key August highs at 1.1367.
A break above these would provide a compelling case for a bullish breakout higher towards the lower ceiling of long-term range resistance at 1.1500.
US Data to Watch
There is a lot of US data on tap over coming days with the first significant statistic being the Services PMI for September due for release on Tuesday September 27.
Economists expect the number to have edged up to 51.2 from 51.0 previously.
Consumer Confidence on the same day is forecast to slide to 99.0. Any beat on expectation here could see the USD walk into the mid-week session on the front-foot.
On Wednesday September 28 Durable Goods Orders headline and are expected to fall by -1.5% in August mom, from 4.4% in July.
Core Durable Goods Orders, which are often seen as a more reliable barometer since they cut out volatile components such as expensive one off purchases of large vehicles and airplanes, are expected to fall by -0.4% from 1.3% previously.
Thursday September 28 sees the release of the second estimate of Q2 GDP; the preliminary release showed a 1.1% rise; the reading on Thursday is forecast to surpass that and come out at 1.3%.
Pending Home Sales, also on Thursday, is forecast to come out at 0.3% mom in August, falling from 1.3% previously.
On Friday Personal Consumption Expenditure (PCE) is released and forecast to show a rise of 0.2%.
PCE is keenly watched by the Fed, for whom it is the preferred inflation gauge.
Euro Data to Watch: Look for Increasing Inflation
CPI and unemployment data are both out on Friday.
The effects of previous energy price falls begin to drop out of the HICP index in coming months, so headline inflation will begin to pick up as a result.
"The drag from the two main impacted categories of the inflation basket (transport and home heating) has already begun to ease, and that process should accelerate into the first half of next year," say RBC Capital Markets in their preview of the release.
Economists are also anticipating a reading of 0.4%. Should inflation beat this figure then we will almost certainly see the Euro end the week on a positive note.
Meanwhile the rate of decline in euro area unemployment has moderated in recent months although the overall trend is still downward.
Markets see the unemployment rate for August at 10.0%, a slight improvement on the previous month's 10.1%. This data is likely to be over-shadowed by the inflation release however.
Euro Remains Supported by a Number of Factors
The euro is supported by several major fundamental drivers.
The first of these is the inability of Eurozone banks to ‘recycle’ funds generated by the region’s Trade surplus.
Eurozone banks cannot recycle the surplus as they are more cautious about lending due to the high number of non-performing loans from the banking crisis (NLPs) they have on their books.
The supper-low interest rates, and negative deposit rates in the Eurozone are another reason for their disinclination to lend, as it is not very profitable for them.
This keeps net demand for the euro positive.
The euro is further supported by the back-flow of funds from the money the money which has been leant abroad.
The mega-low interest rates in the Eurozone make the euro a particularly attractive funding currency for investors seeking to borrow cheaply in order to invest in riskier, emerging market, higher yielding debt.
However, when global uncertainty weighs on the outlook for emerging markets this can be the trigger for an unwinding of those euro sponsored investments, leading to a sudden back-flow of repatriating euros.
The next driver for euro strength could be an ECB’s decision to pull-back from increasing stimulus and adopt a more data-driven, wait-and-see stance.
The final major factor in support of the euro is the steady growth being shown by the region.
A major negative factor against the euro, however, is the political instability in the region, and the fact there are several major member state elections in 2017, which could lead to further erosion of the EU.
The main fundamental theme for the dollar is whether there will be a 2016 interest rate hike from the Federal Reserve.
Anything which increases the probability of an increase in interest rates buy the end of the year will strengthen the dollar, if not it will weaken the dollar.