EURUSD was exchanging hands in the 1.1040s, trading higher on Wednesday amid a broad-based weakening in the US Dollar following the Trump-Harris presidential election debate.
Most analysts agree that Vice President Kamala Harris came out on top during the debate, and a recent poll from the BBC showed that she is ahead with 47% versus former President Donald Trump’s 43%.
The USD is weakening – and as a result EURUSD is rising – because one of Trump’s policies is to protect the Dollar’s status as the world’s reserve currency. This includes penalising countries that refuse to trade in USD by imposing tariffs on their goods. The policy is a response to the growing influence of the BRICS trading bloc and its policy of de-dollarising the global economy.
EURUSD is further strengthening as investors continue to see a sizable chance of the Federal Reserve cutting interest rates by a larger-than-standard 50 basis points (bps) at its next meeting on September 17-18.
Whilst a 25 bps (0.25%) cut is already expected, the probabilities of a larger 50 bps “jumbo cut” currently stand at around 30%, according to the CME FedWatch tool, which bases its predictions on the price of 30-day fed funds futures. A double-dose 50 bps cut would weigh on the USD by reducing foreign capital inflows, but would be bullish for EURUSD.
US inflation data on tap
Wednesday sees the release of US Consumer Price Index (CPI) data for August, which would normally influence Fed rate-cut expectations. However, analysts vary in the extent to which they expect the data to have an impact – some say inflation has fallen so low now that it is irrelevant.
“The (CPI) figure is no longer as overwhelmingly important as it was a few months ago,” said Ulricht Leutchmann, FX Analyst at Commerzbank.
“The fight against inflation has seemingly been won. In the last three months, core consumer price inflation was a meager 1.6% (annualised) – well below levels that would be compatible with the Fed’s target,” he added.
Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman (BBH), however, said that higher than expected US inflation in August, “can reduce the probability of a jumbo Fed funds rate cut in September and underpin a firmer USD.”
Deutsche Bank’s Jim Reid, meanwhile, makes the point that an important deflationary factor is the steep fall in crude oil prices over recent days, with WTI crude now trading in the mid $60s per barrel.
“From the Fed’s perspective, one trend that’s helping to remove inflationary pressures has been the sharp decline in Oil prices over recent weeks,” he said in his “Early Morning Reid.”
ECB meeting in focus
EURUSD upside is likely to be limited, however, by growth concerns in the Eurozone.
Germany, in particular, is suffering from a much-publicised slowdown in manufacturing, especially in its key automobile sector, due to foreign competition.
The European Central Bank is scheduled to conclude its policy meeting on Thursday, and the consensus expectation is for the bank to announce a 25 bps cut to its deposit facility rate in order to help stimulate growth.
The deposit facility rate (DFR) is the rate it pays banks on the money they deposit with the ECB. Such a cut would bring it down from 3.75% to 3.50%.
Given the ECB has already announced plans to narrow the spread between the DFR and the main refinancing operations rate (MRO) from 50 bps to 15 bps (from September 18 onwards), the implication is that it will also slash the MRO – its headline rate – at Thursday’s meeting. Given the MRO currently sits at 4.25%, narrowing the spread with the DFR to only 15 bps would imply cutting the MRO by 0.60% to bring it down to 3.65%.
Although the changes have already been telegraphed to the market, there is still a risk the Euro could weaken after the announcement. However, it is the updated macroeconomic projections that could provide the most volatility, with a risk the ECB could cut its growth forecasts. Such a move would weigh on EURUSD.
“Sluggish Eurozone economic activity suggests the risk is the ECB tweaks lower its inflation and real GDP growth forecasts. This can lead to a downward adjustment to Eurozone interest rate expectations against EUR,” said Elias Haddad at BBH.
Technical Analysis: EUR/USD continues posting lower lows
EURUSD has broadly declined since peaking at 1.1202 on August 26. Despite a reaction higher between September 3-6, the pair has continued posting lower lows, most recently on Wednesday, when it fell to 1.1017. The pair is, therefore, probably in a downtrend and, since “the trend is your friend,” it could be argued the odds favor lower prices to come, although the downtrend is not strong.
EURUSD chart by TradingView
(Source: OANDA)
