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Optimism that a fresh US fiscal stimulus package could be announced ahead of the presidential election has faded and the market outlook has been overtaken by rising fears connected with the second wave of COVID-19. Insofar as Europe is in the grip of a second wave of the pandemic and fears about deflation in the region are widening, the EUR’s shine appears to be dimming. Economists at Rabobank forecast the EUR/USD pair at 1.17 on a one-month view. 

Key quotes

“Press reports on Wednesday have hinted at the possibility of another national lockdown for France from Thursday night. In Germany there are reports that Chancellor Merkel could close all restaurants and bars and some other venues from November 4. In Rome protests have erupted in dissatisfaction about the latest restrictions.”

“Friday is set to bring news of a sharp rebound in the level of economic activity in the Eurozone in Q3: the Bloomberg market median for the advance GDP growth release stands at 9.6% QoQ. Additionally, the data will be accompanied by the latest round of Eurozone CPI inflation data which can be expected to provide further evidence that deflation is persisting.”

“Having been buoyed by the creation of long EUR positions in the spring and summer, we see the EUR as now vulnerable to further selling pressure against both the USD and the JPY. While a steady policy outcome from the ECB tomorrow would likely lend the EUR support, given the worrying economic backdrop in the EUR, we would expect any rebound in EUR/USD and EUR/JPY to be short-lived.”

“While the huge liquidity facilities put in place by the Federal Reserve this year suggest that the market is unlikely to see anything like the disruption experienced in March in the foreseeable future, we do expect reduced risk appetite to translate into a covering of short USD positions. We look for EUR/USD at 1.17 on a one-month view and see risk of a dip to EUR/USD 1.16 in three-months.”