Euro Hits 7-Week High, But Analysts Believe the Trend Will Not Last Long

The eurodollar gained against the greenback Friday to close at 1.1885, reflecting the strongest level since September 15, as investors turned towards riskier assets while waiting for the final outcome of the US election. Notably, Democrat Joe Biden has already taken a lead in Georgia and Pennsylvania, while counting of votes is continuing in Arizona, Nevada, and North Carolina. Investors were also worried about the negative effect of fresh lockdown prohibitions on Europe’s rebound.

The dollar index finished at 92.30 Friday, reflecting a nine-week low, against the backdrop of the US presidential election. The 1.9% weekly decline is the largest since March. As a matter of fact, the greenback has been softening since May against the increasing levels of debt in conjunction with anticipations for a prolonged period of low-interest rates.

Rabobank has forecast the EUR/USD exchange rate to trade at 1.16 and 1.14 in the next three and six months, respectively, partially because of the perception that soon after the election uncertainty disappears, the veracity of a divided Congress will be extremely supportive for the greenback.

Some of the recent economic data also favor the euro dollar’s uptrend. The IHS Markit Eurozone Composite PMI declined to 50 in October, from 50.4 in the earlier month. The final reading was slightly higher than the initial estimate of 49.40. Manufacturing output growth rose to the strongest level in more than two-and-a-half years, with PMI reading at 54.8 in October, compared with 53.7 in September. On the contrary, service sector activity shrank again to the lowest level since May, with the PMI reading declining to 46.90 in October, from 48 in the earlier month.

For the first time in four months, fresh business fell for the first time and backlogs of work declined for the 20th consecutive month. However, firms did not have any issue in managing their workloads in spite of another round of job cuts. Going forward, in the year ahead, business confidence stood in positive territory during October, but decline to the lowest level since May.

The IHS Markit Eurozone Services PMI declined for the third consecutive month to 46.90 in October, from 48 in September and better than the preliminary estimates of 46.20. The reading reflects the lowest level since May, with the rate of shrinking expediting to the fastest in five months.

There was a decline in both domestic and foreign demand. Fresh export orders fell at a substantial pace for the twenty-sixth consecutive month. For the eighth month in a row, employment declined, albeit the rate of shrinking was small. As made clear by a fifth consecutive monthly rise in input costs, mild cost pressures remained unchanged during October.

By comparison, market pressures and a weak demand landscape have contributed to another round of reduced rates among service providers in the eurozone. Ultimately, optimism about the future fell to a five-month low.

The IHS Markit Eurozone manufacturing PMI increased to 54.80 in October, from 53.70 in September and higher than the initial estimate of 54.40. The recent reading reflects the sharpest month of expansion in the manufacturing industry since July 2018 as output growth expedited to more than two-and-a-half-year high and fresh orders increased by the highest level since the beginning of 2018.

However, there were some negative economic data as well. The eurozone’s retail trade declined 2% m-o-m in September, following a downwardly amended 4.2% expansion in August and higher than economists anticipations for a 1% decline. It was the largest drop in trade since the record decline in April. Non-food products sales plunged by 2.6%. Additionally, e-commerce plunged 5.5%.

The IHS Markit Eurozone construction PMI also declined to 44.90 in October, from 47.50 in the earlier month, reflecting the eight successive monthly drop in output. Activity declined across all three tracked construction industries, with the sharpest decline recorded in civil engineering, followed by the commercial industry.

Several Forex analysts have opined that the euro can decline further against the greenback. The forecast is based on the assumption that the eurodollar will be weighed by economic contraction, while the greenback will gain from a lengthy battle over the US election outcome.

Jane Foley, Senior FX Strategist at Rabobank, said “Without a blue wave in Washington it is possible that the bickering over the size of stimulus could continue this side of the election. The combination of political uncertainty, delays to stimulus combined with the surge in Covid-19 cases in the US and in Europe all point to a decline in risk appetite and that backdrop suggests that the safe haven USD will find support.”

Kit Juckes, foreign exchange strategist at Société Générale, “At least the market has a narrative: A Democrat President who doesn’t control the Senate, will be less combative on trade, but will be more limited where fiscal policy is concerned. This leaves a bigger role for the Federal Reserve, which means even lower rates for longer, even more QE for longer. So the dollar is weaker, spreads are tight, equities have rallied around the world this week and volatility is (even) lower than it was.”

Kamal Sharma, FX Strategist at BofA, said “We do not believe markets are prepared for potential heightened social and political tension, increased economic policy uncertainty and fiscal policy paralysis when 20 million Americans still require jobless benefits that have either expired or are about to. To hedge this risk, we like short euro.”