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EUR to USD Exchange Rate Recovers to Fortnight-High in Reaction to US Mid-Term Elections

November 7, 2018 - Written by Minesh Chaudhari

While the results of the US 2018 Mid-Term Elections were largely unsurprising, the Euro to US Dollar (EUR/USD) exchange rate still benefitted from US Dollar weakness as US President Donald Trump’s ability to push through fiscal policy was perceived to have weakened. The Euro was supported by some of this week’s Eurozone data.

Despite sliding slightly last week from the level of 1.1409 to 1.1387, EUR/USD has since recovered those losses and then some. At the time of writing on Wednesday, EUR/USD trended near a high of 1.1495. It was the best EUR/USD level in over a fortnight, since the pair last tested the level of 1.15 on the 22nd of October.

EUR Recovery Boosted by Some Solid Eurozone Ecostats

Eurozone data has shown signs of weakening more than expected in recent weeks, and this has been a major cause of Euro weakness.

As a result, relatively solid Eurozone data published in recent sessions helped to support Euro strength, making it easier for the shared currency to benefit from US Dollar weakness.

Wednesday saw the publication of the Eurozone’s September retail sales results. While the monthly retail sales figure fell short of forecasts at 0.0%, the previous figure was revised higher from -0.2% to 0.3%.

The year-on-year print was even more relieving. The previous figure was revised higher from 1.8% to 2.2% while the September print came in at 0.8% rather than the expected 0.7%.

The data did continue to indicate that the Eurozone’s economic activity was slowing, but as it was better than previously thought the news still supported the Euro.

On top of this, Germany’s September industrial production results beat forecasts. The previous figure was revised higher from -0.3% to 0.1%, and the September figure came in at 0.2% rather than the forecast 0.1%.

Lastly, a notable market gauge of Eurozone long-term inflation expectations hit its best level in five weeks. The measure, closely followed by the European Central Bank (ECB) had recently touched its worst levels in a year.

Wednesday’s news followed Tuesday’s Eurozone PMI results from October, which beat projections overall despite disappointing manufacturing data last week.

Overall though, the data continues to indicate that the Eurozone’s economic activity has slowed notably towards the end of the year, limiting the Euro’s potential for gains.

USD Sold as Investors Digest US Mid-Term Election Results

Investors sold the recently strong US Dollar on Wednesday, as they digested the results of the US 2018 Mid-Term Elections.

While the results of the elections largely met pollster forecasts this time and was not seen as a huge shock, the reality that US President Donald Trump would likely not be able to push new fiscal policy into law sunk in and investors sold the US Dollar.

Part of the US Dollar’s recent strength has been due to market-friendly fiscal policy Trump has implemented during his term so far.

The Democratic Party took majority control of the House of Congress during the Mid-Term Elections, limiting Trump’s ability to pass legislation through the House.

According to Kathy Lien, Managing Director of Currency Strategy from BK Asset Management:

‘If Congress is split, with the Democrats controlling the House and Republicans the Senate, the prospect of legislative gridlock that would make it difficult for policies such as the President’s middle-class tax cut to pass is negative for the US Dollar,’

EUR/USD Forecast: German Trade Data and Fed Decision in Focus

As the results of the Mid-Term Elections were generally unsurprising, they may not continue to drive the Euro to US Dollar exchange rate for too long.

However, if US President Donald Trump becomes unable to push through further fiscal policy, the US Dollar’s recent streak of persistent bullishness could be dampened going forwards.

The Euro will continue to be driven by Eurozone data towards the end of the week, which could limit its potential gains against the US Dollar if they disappoint.

Germany’s September trade balance results will be published on Thursday. If they fall short of expectations it could worsen concerns that US trade protectionism is having a concerning impact on German economic activity and trade.

As for the US Dollar, the Federal Reserve’s November policy decision on Thursday may prove even more influential to the Euro to US Dollar exchange rate.

Investors will be carefully watching the Fed’s tone on its monetary policy outlook. As US data has been recently strong, any signs that the pace of US interest rate hikes could be stronger than expected going forward would boost US Dollar demand.
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