- European capitals, recovery outlook hit by new government restrictions.
- U.S. lawmakers still AWOL as doubts also rise over EU’s recovery fund.
- EUR/USD eyes test of key support as DE yields set to surf lower in Q4.
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- EUR/USD spot rate at time of writing: 1.1707
- Bank transfer rate (indicative guide): 1.1295-1.1377
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The Euro-to-Dollar exchange rate was on the back foot and eyeing a test of key support at nearby levels on Thursday as European capitals were clobbered by fresh government restrictions and the economic outlook was ridden over roughshod in the name of coronavirus containment.
Europe’s single currency got the better riskier rivals but was knee-deep in the red against the Dollar and other safe-havens as a wave of new restrictions were imposed on European capitals and countries, and as fiscal support increasingly looks to be absent from the field on both sides of the Atlantic.
Britain followed Germany and France in tightening restrictions in the capital on Wednesday, with London moved to level two of a new three stage system of restrictions after Germany imposed limits on the numbers of people who can gather together and ordered that masks be worn in crowded public places.
This was after France announced an evening curfew for Paris and other cities that comes into effect every 21:00 from Saturday, casting further doubt over the winter economic outlook and whether the Euro can sustain current lofty levels above 1.17 against the Dollar.
“Sentiment in Europe was impacted by yet further increases in COVID case counts (Germany posted a record 7,173) and restriction (in UK, London is poised to enter Tier 2 restrictions and Manchester may be assigned the highest Tier 3 alert level), less favourable comments about progress on EU/UK trade talks and increased EU action against tech giants as the EC Summit is about to start this afternoon,” says Tim Riddell, a London-based strategist at Westpac. “As prospects for a USD stimulus agreement prior to the election fade to near zero, focus will be on further earnings reports, Empire (NY) and Philly Fed surveys (both expected to ease from recent high levels), weekly claims and yet more Fed speakers as well as commentaries from the IMF.”
New restrictions come as politics stymy support for American households who saw the fiscal rug pulled from under them in July, and as the EU’s much-vaunted coronavirus recovery fund - which was also sought to endow Brussels with new powers and financial leverage over members - hits continued snags.
Above: Euro-to-Dollar rate shown at 15-minute intervals alongside S&P 500 index (blue line, left axis).
With pandemic-related restrictions and the resulting economic economic disruption normalised in the mind of the many, the dust has settled on the rows that preceded the recovery fund’s crafting only for Poland and Hungary to stop playing ball with other European capitals.
“Fund disbursement risks being impacted by disputes over the rule of law in parts of the EU, (Hungary and Poland). Additionally, the scale of the grant payments, amounting to €310bn appears modest when stretched to the end of the MFF. Against such uncertainties, we would conclude the aggressive spread compression on easing fragmentation risks looks overdone,” says Jeremy Stretch, head of FX strategy at CIBC Capital Markets. “The capitulation in investor expectations in the latest ZEW survey appears a function of rising case numbers and tightening of lockdown restrictions.”
The EU’s recovery fund provides for €750bn of grants and loans to be distributed to member states over a seven-year period, but monies from the fund and future European budgets are conditional upon “the respect of the rule of law,” as defined and interpreted by Brussels, which places East European members in a tight spot.
Some members have long used Brussels’ rule of law framework to undermine the elected governments of Poland and Hungary whose policies have sometimes been controversial in other corners of Europe. East European members receive some of the largest handouts from the EU's budgets.
Doubts are now rising about whether monies from the recovery programme will ever see the light of day, much less Italian government coffers, with consequences for continental bond markets as well as the Euro. CIBC says these doubts could lead to further falls in German government bond yields in the weeks ahead, which is not normally good news for the single currency.
Above: Euro-to-Dollar rate shown at 4-hour intervals alongside Germany 10-year bond yield (black line, left axis).
The Euro-Dollar rate was down -0.32% at 1.1707 Thursday but could face further downward pressure from technically-oriented traders upon a daily close beneath 1.1695. This is the last technical impediment to a slide back to 1.1612, before sub-1.15 levels come into view, which haven’t been seen since July.
“EUR/USD intraday Elliott wave counts remain negative and this suggests that attention should remain on initial support at 1.1695. We consider this to be a key near term break down point and failure here would re-target the recent low at 1.1612. Below 1.1612 would target the 1.1495 March high, which if seen, is expected to hold,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who’s advocated that clients sell EUR/USD around current levels.
Coronavirus restrictions are a long way off those seen in the first-quarter but they do encumber a recovery that was already thought to be waning, the outlook for which will be further impaired by any failure of the recovery fund.
The EU’s next seven-year budget, which runs from January, cannot be approved or operationalised without a unanimous endorsement from member countries. Without that endorsement, the fund may never see the light of day and the European Union might run the risk of being paralysed from January onward.
“After a summer that many optimistically thought was the start of a healthy post-pandemic bounce-back, cracks are once again appearing in the global economy,” says James Rossiter, head of macro strategy at TD Securities. "As lockdowns begin to spread yet again, policymakers remain key to supporting the rebound, particularly as it relates to the labour market."
Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 index (blue line, left axis).
Fiscal policy, coronavirus concerns and German bund yields are all headwinds for the Euro-to-Dollar rate in the here and now but during the weeks ahead, the single currency will also have to navigate the U.S. election.
The likely outcome of which may have grown either less certain, or more uncertain, this week in the wake of a bombshell story from the New York Post purporting to have evidence of political graft in the office of the vice president while it was occupied by opposition candidate Joe Biden.
“You are either reading all about this, or you aren’t aware of it, depending on which media you follow - and which stories they follow,” says Michael Every, a strategist at Rabobank. “Notably, Facebook made clear it would be suppressing this particular unconfirmed story, unlike a slew of others, some of which have subsequently proved to be wrong. So did Twitter. The editor of the New York Post --running the Hunter story, and which can be sued for defamation and libel-- claims he was blocked from tweeting it by Twitter, which can’t be. Other users trying to do the same saw the message: “We can’t complete this request because this link has been identified by Twitter or our partners as being potentially harmful. Visit our Help Center to learn more.” Those trying to share the story got a message saying the link was “unsafe”, “potentially spammy”, “malicious”, “violent”, or “misleading”. The original tweet from the New York Post was also deleted by Twitter, and the accounts of some people trying to retweet it were suspended.”
The story was initially buried by technology companies before that censorship itself became a story. Under threat of legislation, those companies have voluntarily operated as censors at the behest of politicians, but wittingly or unwittingly enabled the same politicians to avoid the scrutiny that would come with debating in public the pros and cons of censorship. Debate might lead to a societal conversation, if-not risk electoral consequences for some governments.
Censoring political speech is what you’d expect in countries like China, North Korea, or Iran — NOT America.— Kayleigh McEnany (@PressSec) October 15, 2020
This should scare every single American who values free and open discourse. Do NOT let Big Tech silence YOU‼️#TwitterCensorship
Above: Euro-to-Dollar rate shown at weekly intervals alongside Dollar Index (black line, left axis).
Censorship is often couched in language that purports to be combating ‘misinformation’, ‘disinformation’ and 'fake news' - which can all often be highly subjective and therefore, in the eye of the beholder. Many have accepted in recent years that such a thing as ‘fake news’ does exist, while simultaneously accepting with few questions the ideas pumped out by a polling industry that has gotten so many things so very badly wrong of late, particularly in the UK.
If polls are ever anything to go by, Biden is a shoe-in for President Donald Trump, who’s widely said to have handled the pandemic badly. This is despite presiding over a union where states are largely responsible for containment and being one of the few to defy the World Health Organization when it urged countries to keep borders open for travellers from China, even as China eventually raced to construct frontiers within its own territory.
The outcome of the election will become known in the early hours of November 04 and will have consequences in part due to recent steep declines for the Dollar Index and matching gains for the Euro as well as other risk-sensitive currencies. The Euro-to-Dollar rate might not take very well to any surprise victory by the incumbent and could be likely to celebrate an opposition win.
“The outcome could be tighter than it now looks. Trump could still win and if he does not, he might dispute the result,” says Georgette Boele, a senior FX strategist at ABN Amro. “If investors start to focus on the potential economic outperformance of the US versus other countries, the dollar could recover, especially if investors become more concerned about the state of the eurozone and UK economy. A Democrat sweep would have a more positive impact than a Biden win with a divided Congress.”