EUR/USD Rate: Analysts Unconvinced any EUR Strength will Last

The EUR/USD has managed to defend the 1.10 support zone but analysts remain unconvinced that bouts of strength in the Euro can be sustained.

EUR/USD trades at 1.1062 at the time of writing having opened this week's account at 1.1094.

The US Dollar gapped higher at the start of the new week on news that the FBI sent a letter to Congress saying that Hilary Clinton hadn’t committed a crime with her private server.

The announcement triggered a rapid repricing of a Clinton victory by financial markets; a move that entailed buying Dollars.

Despite the latest development it must be remembered that Trump and Clinton remain neck-in-neck in the polls and the outcome is by no means assured.

Expect further volatility.

On a fundamental basis, the gains in the Euro come despite some underwhelming signals coming from the Eurozone of late which makes the European currency look vulnerable at such altitudes.

Eurozone services and composite PMIs were somewhat disappointing, weighing on the EUR somewhat; France and Italy reported softer than expected data while Germany matched the composite reading expectation despite missing slightly on the service report.

Overall Eurozone data came in well below forecasts for services (52.8 vs. 53.5 expected) while the composite read of 53.3 undershot the street call of 53.7 slightly.

The data still reflect growth, just a slightly weaker pace.

Concerning the outlook, analyst Shaun Osborne at the Bank of Nova Scotia says he sees the pair turning lower “with the move up to the low 1.11 area that we had been expecting to see unfold over the past week largely complete and the EUR showing signs of stalling against key resistance point in the low 1.11 area”.

Osborne thinks the EURUSD risks turning lower to resume the broader downtrend from here.

Scotiabank spot key resistance at 1.1110/20 and would rather fade EUR strength at present.

Also noting a waning in upside momentum for the Euro to Dollar exchange rate is Robin Wilkin at Lloyds Bank.

Wilkin believes EUR/USD should trade between 1.1180-1.1200 and 1.1270 to the upside and interim support at 1.1030/00 as we head into the US election next wee.

However, Wilkin’s view on the longer-term picture is interesting:

“Long term, we are wary that the 1.0450-1.17 range is developing as a “flag” consolidation ahead of a test of key long-term support in the 1.00-0.99 region, but other USD structures are clouding whether this is actually the case or not. We continue to monitor and for now the range is expected to persist.”

Expect Near-Term Volatility

For the week ending November 4th the Euro outperformed the Dollar by over a percent.

It appears election fever has finally gripped foreign exchange markets, with North America currencies bearing the brunt of the uncertainty posed by a tightening gap in the polls.

“The week has all been about the shrinking opinion poll gap between Hillary Clinton and Donald Trump. A 7point lead for Mrs Clinton two weeks ago has been whittled down to 1.3% on the last reading and anxiety haunts the currency market. The Dollar’s the main loser in G10, beating only the Canadian dollar which is an obvious ‘loser’ from Mr. Trump winning,” says Kit Juckes at Societe Generale.  

Political risk has tripped the U.S. currency's strong run to the Euro and Pound’s benefit.

The lingering risk of a Trump presidency should continue to underpin the Euro ahead of the November 8th vote.

Should Clinton win this would be seen as a signal for U.S. policy continuity which should allow the US Fed to proceed with their December interest rate rise.

Beware the potential for large moves in foreign exchange markets around the election as we are told market liquidity is likely to dry up.

“The polls continue to tighten and we see the risk that following payrolls market liquidity dries up, as market participants await for Tuesday’s election results. Reduced liquidity is likely to inject greater dispersion in the price action,” says Mark McCormick at TD Securities.