Trump, German Sentiment Data Spark Bounce in EUR/USD Exchange Rate
The optimistic outlook for the German economy combined with an unexpected recovery in the polls for Donald Trump have afforded EUR/USD some temporary relief.
The EUR/USD pair recovered midweek, rebounding from its 1.0850 lows to reach highs 1.0950.
The bounce was down to contrasting sentiment indicators between the United States and Germany which showed an uptick in the German Ifo Sentiment gauge and a downtick in US Consumer Confidence.
The strong German sentiment indicators suggest a slowdown is unlikely to happen in the fourth quarter, which could raise question marks about whether the European Central Bank (ECB) will extend its stimulus programme.
“With the sentiment indicators – notably in Germany – having shown a robust economic growth picture of late, a slowdown in economic momentum is unlikely in the fourth quarter,” commented Ralf Umlauf of Helaba Economics in Frankfurt.
Nor is the improvement so marked as to suggest the possibility of the European Central Bank reducing (or “tapering” in central bank parlance) stimulus either.
Germany may be doing fine, but France is letting the side down somewhat.
“French sentiment indicators were compelling only to some extent; accordingly, the scenario on the European front is somewhat more moderate. In our view, therefore, it would be too early to bet on any near-term tapering of monetary stimulus by the ECB,” said Umlauf.
Mario Draghi’s cryptic phrase that stimulus would not be halted “abruptly” has bemused markets since the last meeting, but has finally come to mean a suggestion of the possibility of tapering, however, this now looks unlikely, according to Helaba’s Umlauf.
Trump Aids EUR/USD Bounce
The recovery move in EUR/USD was exacerbated by news Donald Trump leads in a Bloomberg poll of voters in Florida by 45% to Hillary Clinton’s 43%.
Trump has almost been entirelypriced out of the market because of Clinton’s growing lead in recent polls, but this may now be priced back in, after his shock lead in the Florida poll.
The policy mix advocated by Trump would in all likelihood mean the US Federal Reserve would opt not to raise interest rates at their December meeting.
Much of the Dollar's recent strength has been attributed to growing expectations for a December rate rise with market-based indicators suggesting a likelhood as high as 70% this week.
A trump victory therefore makes the prospects of a USD-supportive rate rise less likely.
Upside to Remain Limited
From a technical perspective, EUR/USD has broken below key long-term support at 1.0915 and rebounded back up to just below the S3 monthly pivot at 1.0969.
It will find it hard breaking back above S3, but a move above 1.1000 would confirm such a break and generate a target at 1.1080.
The marginally more likely scenario is a continuation lower, especially now technical studies have shown a bearish cross of the 200-day moving average by 50-day.
A continuation lower is likely if there is a break below the 1.0850 lows, leading to a move down to 1.0800 initially, and then a move below 1.0780 confirming an extension down to 1.0700.
