EUR/USD rises toward 1.0900, upside seems limited ahead of US presidential election

• EUR/USD appreciates as the US Dollar receives downward pressure following the release of weaker Nonfarm Payrolls on Friday.
• The US Dollar may receive support from safe-haven flows amid uncertainty surrounding the US presidential election.
• The Euro found support as recent economic data in the Eurozone has prompted traders to reassess the ECB’s policy outlook.

EUR/USD retraces its recent losses from the previous session, trading around 1.0880 during Asian hours on Monday. The pair's upside can be attributed to a softer US Dollar (USD) after the release of weaker-than-expected US October Nonfarm Payrolls (NFP) data. However, uncertainty surrounding the US presidential election could drive safe-haven flows, potentially limiting the upside of the EUR/USD pair.

On Friday, data from the US Bureau of Labor Statistics (BLS) indicated that October’s NFP increased by only 12,000, following a revised September gain of 223,000 (down from 254,000), which fell well short of market expectations of 113,000. Meanwhile, the Unemployment Rate remained steady at 4.1% in October, matching the consensus forecast.

According to the final New York Times/Siena College poll, cited by Reuters, Democratic candidate Kamala Harris and Republican nominee Donald Trump are locked in a close contest across seven battleground states just two days before the US presidential election.

The poll shows Vice President Kamala Harris with slight leads in Nevada, North Carolina, and Wisconsin, while former President Donald Trump holds a narrow advantage in Arizona. The two are in tight races in Michigan, Georgia, and Pennsylvania. The poll, conducted from October 24 to November 2, indicates that all matchups in these states fall within the 3.5% margin of error.

The Euro found support from stronger-than-expected economic growth in the third quarter and higher-than-anticipated inflation in the Eurozone, prompting traders to reassess expectations for a larger-than-usual rate cut by the European Central Bank (ECB) in December. Markets have now fully priced in a 25 basis point cut in the ECB’s deposit rate for December, which would be the fourth reduction this year following cuts in October, September, and June.

Preliminary data showed that the Eurozone Harmonized Index of Consumer Prices rose to 2.0% year-over-year in October, up from 1.7% previously and beating forecasts of 1.9%. Meanwhile, the annual core inflation rate held steady at 2.7%. Additionally, Eurozone Gross Domestic Product (GDP) grew by 0.4% quarter-over-quarter in Q3, doubling the growth seen in Q2 and surpassing expectations of 0.2%.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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