EUR/USD, FOMC, Presidential Elections, ECB, Euro – Talking Points:
- Equity markets moved higher during APAC trade as US presidential election counting continues to progress.
- The increasing likelihood of a Joe Biden presidency may stoke risk appetite.
- EUR/USD rates testing key resistance ahead of the FOMC monetary policy meeting.
Asia-Pacific Recap
Equity markets continued to climb during Asia-Pacific trade as a Joe Biden presidency becomes increasingly likely.
Australia’s ASX 200 index rose 1.28% and Japan’s Nikkei 225 climbed 1.64%.
The haven-associated US Dollar and Japanese Yen crept higher against their major counterparts, while the risk-sensitive Australian Dollar drifted lower.
Gold moved marginally higher while silver jumped 1.28%, as US 10-year Treasury yields drop 3 basis points.
Looking ahead, monetary policy decisions from the Bank of England and Federal Reserve headline the economic docket.
Market reaction chart created using TradingView
Biden Closing in On Victory May Buoy Euro
As noted in yesterday’s report, a wave of national lockdowns across Europe is threatening to upend the trading bloc’s nascent economic recovery and have limited the potential upside for the Euro against the US Dollar.
However, the increasing likelihood of a Joe Biden administration could drag on the haven-associated Greenback and allow the Euro to push higher in the short-term, as the chances of a contested election begin to dissipate.
The former Vice President is, at the time of writing, just 6 Electoral College (EC) votes away from claiming the White House and currently holding a narrow lead in Nevada, while rapidly closing ground in key battleground states Georgia and Pennsylvania.
Source – Bloomberg
Should Biden win any of the aforementioned states he would attain the 270 EC votes needed to win the presidency and, with the outstanding ballots expected to be skewed in favour of the Democratic nominee, a change in administration looks more than likely.
Of course, with vote counting ongoing this is hardly a certainty. Nevertheless, a looming transition away from the less-than-friendly trade policies of the Trump administration could buoy European investors’ sentiment. A Biden administration is expected to bring a more conventional approach to policy, with cross-Atlantic reconciliation likely high on the agenda.
Therefore, EUR/USD rates may move higher in the near term despite the possibility of further monetary easing from the ECB, if Mr Biden is ultimately announced as President of the United States.
Wait-and-See FOMC To Underpin USD
However, with the chances of a ‘Blue Wave’ scenario – where Democrats control the White House, Senate and the House – rapidly evaporating, attention shifts to the Federal Open Market Committee’s (FOMC) upcoming monetary policy meeting. The provision of addition fiscal aid is expected to be substantially greater in magnitude if the Democrats succeed in taking the Senate.
Members of the Federal Reserve have been notably concerned with the absence of a much needed fiscal support package, with Chairman Jerome Powell warning that the absence of “an additional pandemic-relate fiscal package” could see growth “decelerate at a faster-than-expected pace in the fourth quarter” and governor Lael Brainard stating that “apart from the course of the virus itself, the most significant downside risk to my outlook would be the failure of additional fiscal support to materialize”.
However, it’s yet to be seen if these developments will cause the Fed to adjust its monetary policy settings in the interim, given the outcome of the US presidential election is still unknown and recent comments from former New York Fed President William Dudley suggest that “the real question is how much of an impact would it actually have on the economy and we figure at this point not very much, because the Fed’s already accomplished most of what monetary policy can do to support the economy”.
To that end, the Fed's retention of its current monetary policy settings could disappoint market participants and put a premium on the haven-associated US Dollar.
EUR/USD Daily Chart – 21-DMA Hampering Euro Bulls
EUR/USD daily chart created using TradingView
The EUR/USD exchange rate is eyeing a push to test the October high (1.1881), as price surges away from support at the 100-DMA (1.1633) and pierces through resistance at the August low (1.1696).
With the RSI trending higher and the MACD gearing up to cross above its ‘slower’ signal line counterpart, the path of least resistance looks skewed to the topside.
With that in mind, a daily close back above the psychologically imposing 1.1800 mark would probably encourage would-be buyers and generate a topside push towards the yearly high (1,2011).
On the contrary, failure to hold above the 21-DMA (1.1746) and 50-DMA (1.1738) could ignite a more extensive pullback and bring the monthly low (1.1622) into focus.
Retail trader data shows 41.26% of traders are net-long with the ratio of traders short to long at 1.42 to 1. The number of traders net-long is 1.53% lower than yesterday and 9.85% lower from last week, while the number of traders net-short is 17.05% higher than yesterday and 19.39% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.
Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.
-- Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss