In the early European session on Monday, the EUR/USD strengthened to about 1.1175. France’s outlook was revised from “stable” to “negative” by Fitch, which could limit the Euro’s potential. On Tuesday, Americans will cast their ballots. During Monday’s early European trading hours, the EUR/USD pair gains strength and approaches 1.1175. As the Eurozone and German GDP figures exceeded projections for the third quarter, the Euro gained ground versus the US dollar. Later on Monday, traders are anticipating the US ISM Manufacturing Purchasing Managers Index and Germany’s Retail Sales figures. The Eurozone economy increased more than anticipated in Q3, according to data released on Friday, demonstrating resilience despite the effects of the Middle East conflict and rising energy prices. Compared to 0.6% increase in Q2, the Eurozone GDP grew by 0.4% QoQ in Q3, exceeding the 0.2% forecast. In contrast to a 0.3% increase in Q2, the German economy expanded by 0.2% QoQ in Q3. This number exceeded the 0.1% market consensus.
However, credit ratings agency Fitch on Friday revised France’s outlook to “negative” from “stable”, warning that worsening fiscal conditions and political risks are undermining debt stabilization prospects. This, in turn, could undermine the shared currency in the near term. On Tuesday, Americans will cast ballots to determine whether the Democratic Party can unseat US President Donald Trump’s Republican Party in Congress. The outcome of the Senate race is still up in the air, but Democrats are predicted to win a majority in the House of Representatives. Brown Brothers Harriman’s Elias Haddad highlights that “resilient Eurozone economic activity and inflation projected to remain above target for an extended period keep a December rate hike to 2.75% firmly in play (86% priced in).” He notes that “real GDP rose 0.4% q/q in Q3 vs. 0.6% in Q2, double the consensus forecast, as growth in Spain and Germany offset France’s contraction,” underscoring the region’s underlying strength despite pockets of weakness. Against this backdrop, Haddad argues that the “bottom line: limited policy divergence between the ECB and Fed offers EUR/USD support,” with the current rate outlook helping to underpin the Euro.
At the same time, he cautions that “France’s ongoing fiscal troubles can drive EUR/USD down to 1.1000,” suggesting that country-specific risks could yet weigh on the currency. On the institutional front, BBH stresses that “the ECB leadership change is unlikely to alter the near-term policy outlook and has no material implication on EUR. The ECB Governing Council is not a one-person show; 21 members have voting rights, including six Executive Board members and 15 governors of the national central banks.” EU leaders are scheduled to meet on November 26-27 “to discuss who will take over the ECB’s top job,” with “Spain’s Pablo Hernandez de Cos and the Netherlands’ Klaas Knot” reported as the frontrunners to succeed the current president. With an FXS Speechtracker score of 8.2 compared to a historical average of 6.9, the ECB’s Nagel issues a stronger-than-usual warning about inflation, indicating a definite hawkish trend. Expectations that policy tightening will remain firmly on the table in the event that price pressures re-accelerate are reinforced by the ECB’s promise to take “decisive action if needed” to bring inflation back to target.
A more watchful approach to inflation concerns is supported by Nagel’s emphasis that consumer price growth has resumed and that additional price increases “can’t be ruled out,” spurred by rising energy costs. Because markets may price in a greater likelihood of further restrictive measures if data continue to surprise on the upside, this combination of increased inflation worry and readiness to act is favourable for the Euro. As spot stays below the 100-day simple moving average on the daily chart, EUR/USD has a negative near-term bias. The pair remains rooted in the bottom half of the current volatility envelope as the price also trades below the Bollinger Bands 20-period middle SMA. Meanwhile, the Relative Strength Index (14) at 40 indicates weak but stabilising negative momentum rather than outright oversold circumstances. A more considerable cap appears at the 100-day SMA at 1.1425, while first resistance on the upside is in line with the Bollinger middle band at 1.1195, ahead of the upper Bollinger band near 1.1260. The next significant support on the downside is the lower Bollinger band around 1.1130; a clear break below this floor would reopen the door to new lows inside the current bearish pattern.
