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EURUSD: Brexit and Covid drag down euro

The EURUSD pair was little changed on Wednesday, October 14. The single currency rose 0.02% to 1.1745. After falling to 1.1720, the price jumped to 1.1771 amid a rally in the British pound and weakness across the board in the US dollar.

Sterling climbed 201 pps to 1.3064, according to a report from Bloomberg. The report said, citing well-informed sources, that the UK will remain committed to its dialog with the EU in an effort to break the deadlock and reach a trade deal with the EU after the soft October 15 deadline set by PM Boris Johnson.

The US currency corrected slightly during the North American trading session. Risk assets were adversely impacted by the temporary suspension of antiviral drug trials by Johnson & Johnson and Eli Lilly, as well as fading hope among investors that stimulus measures will be passed before the presidential election in November. Treasury Secretary Stephen Mnuchin Doubts yesterday again dashed hopes that the relief bill would get the nod anytime soon.

"At this point, getting something done before the elections and executing on that would be difficult just given where we are and the level of detail, but we’re going to try to continue to work through these issues,” Mnuchin said.

House Speaker Nancy Pelosi spurned the White House proposal for a $1.8 trln aid package, claiming it falls "significantly short of what this pandemic and the deep recession demand."

Today’s macro agenda (GMT 3)

  • 11:30 UK: report on lending conditions
  • 15:30 US: Philadelphia Fed manufacturing index and NY empire state manufacturing index (October), import prices (September), initial weekly jobless claims
  • 16:00 UK: BoE deputy governor financial stability Cunliffe speech
  • 16:30 UK: leading indicators index (August)
  • 16:45 Canada: BoC deputy governor Lane speech
  • 18:00 US: EIA weekly petroleum inventory status report
  • 18:00 US: Fed Quarles speech
  • 18:00 US: Fed Kaplan speech
  • 19:00 EU: ECB president Lagarde speech
EURUSD: Brexit and Covid drag down euro

Current outlook

In Asian trading, the dollar has been pushing higher against all major currencies. Notable underperformers include the Australian and New Zealand dollars. The Aussie came under pressure after a speech by RBA governor Philip Lowe. Lowe took a more relaxed stance, committing not to raise the bank's interest rate until inflation steadily reaches the 2-3% target range. In addition, he intimated that further easing by the RBA would entail a cut in the cash rate to 0.10%, the 3-year bond yield target, and would also likely lead to the expansion of long-term bond purchases.

Buyers are constrained from above by the balance line. The euro is unlikely to move higher due to the rapid spread of the coronavirus and the lack of a vaccine. So at this point, we believe that only upbeat Brexit news can cause FX market sentiment to shift, but so far there has been no headway in the negotiations.

British PM Johnson, in a conversation with the head of the European Commission, Ursula Van der Leyen noted the desirability of a deal with the European Union, but expressed disappointment that there had not been more progress in Brexit trade talks over the past two weeks.

A number of European countries continue to reinstate containment measures that were lifted after the first wave of the Covid-19 coronavirus. Restaurants, cafes and hotels are closing.

At the time of writing, the euro was trading at 1.1703. After yesterday's rise to 1.1771, the intraday pattern on the clock points to 1.1785. On the daily timeframe, sellers are starting to gain momentum. Who wins out in the current tug-of-war depends entirely on incoming media reports about Brexit and the US relief bill. Senate Majority Leader Mitch McConnell said earlier that the Republican-led US Senate would vote next week on a targeted $500 bln stimulus plan.

The bottom line is that market sentiment remains uncertain. Investors await updates on Brexit, the US election and vaccines. The target is 1.1695 for sellers and 1.1785 for buyers.

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