Outlook for the Euro vs US dollar exchange rate: Beyond the Shutdown, Focus on the ECB

For reference's sake: The euro dollar exchange rate is currently trading 0.16 pct higher at 1.3548.

The dollar to euro exchange rate is thus at 0.7381.

Outlook for the Euro Dollar exchange rate by Shaun Osborne @ TD Securities

"We generally feel that political uncertainties in the Eurozone are broadly offsetting the impact of the US government shutdown—for the moment.  

"The USD (and US equity markets) shrugged off the 1995/96 shutdowns with minimal losses and investors do not appear to be unduly concerned about current developments, likely assuming that any “shutdown” in the US government would be brief and have little significant impact on the US economy.

"For the USD, much hinges on how US equity markets react in the near-term.

"The USD has become broadly disconnected from the influence of risk on/off trading in the past few months, to the point that the USD is now generally correlating negatively with volatility for the first time since 2008 (looking at rolling 3m correlations of daily returns).  Higher volatility is now a modest USD-negative—and vice versa.

"Beyond the US government shutdown issue, the ECB policy meeting takes places on Wednesday this month, avoiding a national holiday in Germany.  The meeting will actually take place in Paris.  

"We look for the ECB to underscore its dovish bias due to 1) the firm exchange rate and uncertainty prompted by Italian politics representing headwinds for the growth outlook and 2) recent data releases reflecting weaker than expected inflation and pronounced weakness in credit growth (final September PMI reported at 51.1, down modestly from August’s 51.4).   

"No new policy initiatives are expected, however—the “external” location of the meeting means that significant announcements are unlikely—but the door for more policy accommodation is likely to be left open.

"If volatility remains contained and the ECB leans dovish, EUR/USD will struggle to sustain this morning’s pop to the upper 1.35s and should pressure support in the low/mid 1.34s this week."