With the October ECB meeting out of the way, the focus will move to the US election with the EUR simply “not the dollar”. The EUR will mostly mirror USD sentiment around the US election, but it could be especially vulnerable to a Republican presidency. In contrast, the USD remains supported as markets reduce expectations for a November rate cut, driven by persistent geopolitical risks and the approaching US election. 

EUR: Now is the data game

Disappointing economic data from the Eurozone, along with increasingly dovish ECB statements, have heightened market expectations of further easing. Currently, European rate markets are pricing in approximately 150bps of additional cuts from the ECB by the end of 2025, with a 72% probability of a 50bps cut as soon as December.

The dovish ECB outlook contrasts sharply with the recent reduction in Fed rate cut expectations, fueled by positive US data surprises and rising market optimism around a potential Trump victory in the US election. Consequently, the EUR-USD short-term rate spread has narrowed throughout October, weighing on EUR/USD. In the week ahead, the focus will likely stay on relative price action in Eurozone and US fixed income markets. With some downside from the ECB-Fed rate divergence already factored into EUR/USD, the currency pair may either consolidate or face renewed pressure if rate differentials stabilize and data deteriorate further.

EUR investors will also closely watch the Q3 GDP and October HICP inflation data. Given the current dovish tone of ECB rate expectations, downside surprises in these data points could be necessary to drive any significant weakness in the EUR. Nevertheless, EUR/USD may remain a sell on rallies leading up to the critical US presidential election on November 5.

USD: ‘Trump Trade’

With the US election approaching, the improving odds of a Trump victory have reignited "Trump Trades" among fixed-income investors, contributing to a USD rally. This raises a central question for FX investors: how much further could USD strengthen on a Trump win, and how much could it weaken on a Harris win? Beyond election dynamics, the recent USD gains may also stem from a reassessment of the Fed’s dovish outlook amid positive US economic surprises. The S&P Global composite PMI’s unexpected acceleration highlights growth divergence, with a struggling eurozone supporting a USD-positive backdrop likely to persist. As mentioned in last week’s outlook, a Harris victory could trigger a significant USD selloff, similar to the drop following Joe Biden’s 2020 victory, despite USD's current rate advantage and resilient economic indicators.

Looking ahead to next week, USD investors will closely watch the latest Non-Farm Payrolls, ISM, and PCE data. While recent industrial action and the hurricane season in the US might add volatility to labor data, it may have limited impact on the Fed’s November decision. Overall, USD may continue to find buy-on-dip support as the US election approaches as well as still uncertainty in the Middle East tension.