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: Recession risk?

At its October meeting, the ECB cut rates by 25bp, as expected, citing weaker-than-anticipated activity and inflation data in the Eurozone. The updated policy statement indicated that the ECB now believes inflation could converge more quickly towards the 2% target. During her press conference, President Christine Lagarde maintained a data-dependent approach to policy easing and refrained from committing to further cuts. However, she acknowledged that risks to both inflation and the economic outlook have shifted downward, which led markets to anticipate more aggressive easing ahead, weakening the EUR.

In addition, concerns over potential heavy tariffs from Trump as the US election nears, combined with increasing odds of his victory, could further pressure the EUR in the short term. Meanwhile, with the Fed not in a hurry to cut rates, the policy divergence between the Fed and ECB could weigh on the EUR, especially as markets have already priced in another 25bp cut from the ECB in December. The expectation is that the ECB will ultimately be more dovish than the Fed. Looking ahead, attention will shift to the preliminary Eurozone PMIs, the German Ifo data for October, and upcoming ECB speeches. FX investors will closely watch for signs of further deterioration in the Eurozone's growth outlook and any increased support among Governing Council members for more aggressive policy easing.

USD: The king is return

The USD continues its rally into October, largely driven by uncertainty surrounding the upcoming US election and the potential return of Donald Trump to the White House. Market participants are adjusting their USD exposure as a 'Trump hedge'. They are focusing on two possible outcomes: a Kamala Harris presidency with a divided US Congress, which may result in a dysfunctional government but leave fiscal policy and the economic outlook largely unchanged, or a Trump presidency with a ‘red wave’ in Congress, which could lead to additional fiscal spending, higher inflation, and a less dovish Federal Reserve stance.

In the FX markets, both scenarios tend to favor USD strength. A Harris victory might initially cause the USD to weaken as Trump hedges unwind, but a soft US economic landing could eventually increase demand for USD assets. A Trump victory, on the other hand, is expected to strengthen the USD due to the likelihood of persistent inflation, a less hawkish Fed, and increased macro and geopolitical risks. Notably, Asian currencies were hit hardest by the USD rally following Trump’s 2016 win.

Beyond the election, domestic factors and geopolitical risks also support the USD. US consumer spending remains strong, with retail sales (excluding auto and gas) rising by 0.7% m/m in September, up from 0.2% in August. This robust retail performance points to Q3 GDP growth, with consumption likely growing over 3% annualized. Additionally, uncertainties in the Middle East pose a geopolitical risk, which could enhance the USD’s safe-haven appeal ahead of the election. In summary, both internal and external factors continue to support a strong USD in the near term. Looking ahead, the US calendar is light next week, with October's preliminary PMI data being the key focus. In the absence of major data surprises, investors will closely follow election polls. Further evidence of Trump’s rise in the polls could give the USD an additional boost. Markets will also monitor speeches by Fed officials.

EUR/USD 4H Chart

Disclaimer 

This material is provided for informational purposes only and does not constitute financial, investment, or other advice. The opinions expressed in this material are those of the author and do not necessarily reflect the views of Trive International. No opinion contained in this material constitutes a recommendation by Trive International or its author regarding any particular investment, transaction, or investment strategy. This material should not be relied upon in making any investment decision.

The information provided does not consider the individual investment objectives, financial situation, or needs of any specific investor. Investors should seek independent financial advice tailored to their individual circumstances before making any investment decisions. Trive International shall not be liable for any loss, damage, or injury arising directly or indirectly from the use of this information or from any action or decision taken as a result of using this material.

Trive International may or may not have a financial interest in the companies or securities mentioned. The value of investments may fluctuate, and investors may not get back the amount they originally invested. Past performance is not indicative of future results.

For more information about Trive International, please visit http://trive.com/int

Additional Information 

Investing involves risk, including the potential loss of principal. Diversification and asset allocation strategies do not ensure a profit or guarantee against loss. The content in this material is subject to change without notice and may become outdated or inaccurate over time. Trive International does not undertake any obligation to update the information in this material.

By accessing this material, you acknowledge and agree to the terms of this disclaimer. If you do not agree with these terms, please refrain from using this information.