EUR/USD trades sideways with eyes on US presidential election

• EUR/USD wobbles near 1.0900 ahead of the US presidential election, which will influence market sentiment.
• Investors expect a neck-to-neck competition between Kamala Harris and Donald Trump.
• The ECB is expected to cut interest rates by 25 bps in the December meeting.

EUR/USD consolidates around 1.0890 in Tuesday’s European session. The major currency pair remains shy of the key resistance of 1.0900 on the United States (US) presidential election day. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades steadily near 103.80 at the time of writing. 

The Greenback exhibited a strong buying trend in October as traders were pricing in former US President Donald Trump’s victory. However, it struggles to extend its upside further as traders expect tough competition between Trump and current Vice President Kamala Harris now. The likelihood of Trump’s victory has witnessed a pullback after the Des Moines Register/Mediacom Poll showed Harris gaining a slight lead of three points in Iowa state, where the Republican party gained a clear majority in 2016 and 2020.

“A Red Wave (favoring Republicans) would kick-start a sizeable USD rally. It would rekindle memories of US Exceptionalism, anchored by tariffs, tax cuts, deregulation, and negative impacts on the outlook for EZ and China," according to analysts at TD Securities.

While the US presidential election will be the key event for the US Dollar this week, investors will also pay close attention to the Federal Reserve’s (Fed) monetary policy decision, which will be announced on Thursday. The Fed is expected to reduce interest rates by 25 basis points (bps) to 4.50%-4.75%, according to the CME FedWatch tool. Investors will focus on Fed Chair Jerome Powell's speech for fresh cues over likely monetary policy action in December.

On the economic data front, investors await the US ISM Services Purchasing Managers Index (PMI) data for October, which will be published at 15:00 GMT. The Services PMI is estimated to come in at 53.8, lower than 54.9 in September, suggesting that the activities in the service sector expanded but at a slower pace.

Daily digest market movers: EUR/USD remains flat-lined on the Euro’s mixed performance

• EUR/USD trades inside Monday’s trading range as investors sideline ahead of the opening of polls for US election voting. The major currency pair is expected to be mainly guided by the US Dollar in an event-packed week. 
• While the Euro (EUR) struggles for direction against the US Dollar, it performs weakly against Asia-Pacific currencies after upbeat Caixin Manufacturing and Services PMI. Still, it outperforms other major currencies as traders pare European Central Bank (ECB) dovish bets.
• Market participants expect the ECB to cut the Deposit Facility Rate again in December by a usual size of 25 bps. Earlier, investors were anticipating a 50-bps interest rate cut by the ECB in its last policy meeting of the year as few officials highlighted growing risks to economic growth and emphasized the need for large economic stimulus to boost domestic spending and investment.
• ECB’s large rate cut bets diminished after better-than-expected Eurozone Q3 Gross Domestic Product (GDP) growth, which receded fears of an economic downturn. Meanwhile, revised German and Eurozone HCOB Manufacturing PMI estimates have improved against flash readings. However, the manufacturing output index remained below the 50.0 threshold, suggesting that the contraction trend remains intact.

Technical Analysis: EUR/USD remains shy of 1.0900

EUR/USD struggles for an establishment above the immediate resistance of 1.0900, which also aligns with the 200-day Exponential Moving Average (EMA). The pair rebounded sharply towards the end of October after gaining a firm footing near an upward-sloping trendline around 1.0750, which is plotted from the April 16 low at around 1.0600

The 14-day Relative Strength Index (RSI) climbs to near 50.00, suggesting some signs of a bullish reversal. However, this will only be confirmed if the RSI (14) climbs above 60.0 decisively.

Looking up, if the shared currency pair breaks above the 200-day EMA around 1.0900, it could rise to near the September 11 low around 1.1000. On the downside, the October 23 low of 1.0760 will be the key support area for the Euro bulls.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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