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The euro has shifted lower on the back of dovish commentary from the European Central Bank (ECB). Economists at Rabobank see risk that long EUR positions will be pared back further as covid-19 takes another swipe at the Eurozone’s economy.  Meanwhile, the USD stands to gain on any additional deterioration in risk appetite, though the outcome of the US election will clearly be directional.

Key quotes

“We see scope for a move towards the 1.16 level on a one-to-three month view. Dependent on the path of the pandemic and on the results of the US election, we see scope for a drop to the 1.14 area in the coming months.”   

“The ECB is promising further monetary action soon and the market is speculating that a deposit rate cut could be a measure under consideration. Pushing the deposit rate further into negative territory would likely weigh on the EUR and serve as a reminder that the Fed is the only G10 central bank that has explicitly steered away from a negative interest rate policy.” 

“Irrespective of the impact on the USD from either the covid crisis or the US election we would argue that the rise in EUR long positions through the spring and summer months increasingly appears top-heavy. CFTC speculators’ data suggest that there has already been some pairing back of these positions from their summer peak and this week’s price action suggests this has continued in recent sessions. We would argue that this trend has further to go ahead of the next ECB policy meeting in December.”

“Despite the progress made by the EU in announcing its Recovery Fund this summer, going forward the EUR could still be weighed down by a lack of fresh developments with respect to reforming the fiscal framework in the region.”

“There are concerns that a contested election this year could be a far more volatile event which, on the heels of Black Lives Matter protests and elevated unemployment, could trigger social unrest. Such a result would likely fuel demand for safe-haven assets including the USD.”