Estimating EUR down slide

The European Central Bank left monetary policy unchanged Thursday, but EUR was sold off aggressively after President Lagarde confirmed that more easing is on its way. According to ECB President, they are looking to recalibrate all instruments at their next policy meeting. Analysts believed there was a small chance of a proactive move at today’s meeting, but the central bank will be using the next six weeks to assess how much stimulus is needed, the effectiveness of nationwide lockdowns in Europe and the outcome of the US election. Had they eased today, European markets would have soared but, any positive market flows could disappear on US Election Day. In order to ensure that their actions had durable impact on European assets, it is indeed smarter to wait for a time when their potency isn’t diluted by bigger stories.

ECB President Lagarde said that while Friday’s third quarter GDP numbers could be better, the rise in COVID-19 cases and the associated intensification of containment measures is weighing on activity, constituting a clear deterioration in the near term outlook. The outlook is so dire that she said they can’t rule out a contraction in the fourth quarter.

For FX traders, the big question is how much downside there is in EUR. With the big event behind and Q3 GDP due on Friday, one could see EUR/USD bounce in the next 24 hours. One could see some more risk aversion on Monday and Tuesday but after that, how currencies trade hinges entirely on the outcome of the US Election. A clear landslide victory by either candidate would be less disruptive than an uncertain result.

A stronger than expected US recovery in the third quarter could drive USD and stocks higher. President Trump promised a big stimulus package after the election.  Regardless of who wins, more stimuli may be on the way. While European governments are moving fast to contain the virus in their countries, daily new infections in the US hit its third highest level ever.  The lack of containment measures in the US means there’s no end in sight. The current administration hopes for a vaccine and medical solution, but before that becomes widely available, the numbers will worsen. Personal income and spending numbers are due for release on Friday.

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