EUR/USD rebounds as dollar weakens following Trump-Harris debate

• EUR/USD is up as the US dollar weakens following the Trump-Harris televised debate.
• The consensus was that Vice President Kamala Harris came out better after the debate.
• The USD is falling due to a lower chance that Trump will be able to implement policies favorable to the dollar.

EUR/USD is trading hands in the 1.1040s, trading on Wednesday amid broad weakness in the US dollar (USD) following the televised Trump-Harris presidential debate.

Most analysts agree that Vice President Kamala Harris came out on top during the debate, and a recent BBC poll showed her ahead with 47% to former President Donald Trump’s 43%.

The US dollar (USD) is weakening – and EUR/USD is rising as a result – as one of Trump’s policies is to protect the US dollar’s status as the world’s reserve currency. This includes penalizing countries that refuse to trade in USD by imposing tariffs on their goods. The policy is a response to the growing influence of the BRICS trading bloc and its policy of de-dollarization of the global economy.

EUR/USD rises as investors debate the chance of a jumbo Fed rate cut

EUR/USD continues to strengthen as investors continue to see a considerable chance that the US Federal Reserve (Fed) will cut interest rates by 50 basis points (bps) higher than standard at its next meeting on 17-18 September. While a cut of 25 bps (0.25%) is already expected, the odds of a “jumbo cut” of more than 50 bps currently stand at around 30%, according to CME’s FedWatch tool, which bases its predictions on the price of funds fed for 30 days. future A 50 bps double dose cut would hurt the USD by reducing foreign capital inflows, but would be bullish for EUR/USD.

US inflation data on tap

US consumer price index (CPI) data for August will be released on Wednesday, which would normally influence the Fed’s rate cut expectations. However, analysts vary on the extent to which they expect the data to have an impact – some say inflation has fallen so low now that it is irrelevant.

“The (CPI) figure is no longer as important as it was a few months ago,” says Ulrich Leutchmann, FX analyst at Commerzbank. “The fight against inflation seems to have been won. Over the past three months, core consumer price inflation has been 1.6% (annualized) – well below levels that would be consistent with the Fed’s target,” he adds.

However, Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman (BBH), says: “Higher-than-expected US inflation in August may reduce the likelihood of a jumbo Fed funds rate cut in September and support a firmer USD. ”

Meanwhile, Deutsche Bank’s Jim Reid points out that a major deflationary factor is the steep decline in crude oil prices in recent days, with WTI crude now trading in the mid-$60s a barrel. “From the Fed’s perspective, one trend that is helping to offset inflationary pressures has been the sharp drop in oil prices in recent weeks,” he says on “Early Morning Reid.”

ECB meeting in focus

EUR/USD upside is likely to be limited, however, by eurozone growth concerns. Germany, in particular, is suffering from a much-publicized slowdown in manufacturing, particularly in its key auto sector, due to foreign competition.

The European Central Bank (ECB) is scheduled to wrap up its policy meeting on Thursday, and consensus expectations are that the bank will announce a 25 basis point cut in the deposit facility rate to help boost growth. The deposit facility rate (DFR) is the rate it pays banks for the money they deposit with the ECB. Such a reduction would reduce it from 3.75% to 3.50%.

Given that the ECB has already announced plans to reduce the spread between the DFR and the main refinancing operations (MRO) rate from 50 bps to 15 bps (from 18 September), the implication is that it will also reduce the MRO – its main rate. – at the meeting on Thursday. Given that the MRO is currently at 4.25%, reducing the DFR spread to just 15 bps would involve cutting the MRO by 0.60% to bring it down to 3.65%.

Although the changes have already been telegraphed to the market, there is still a risk that the euro will weaken after the announcement. However, it is the updated macroeconomic forecasts that could provide the most volatility, with the risk that the ECB will cut its growth forecasts. Such a move would weigh on EUR/USD.

“Slow economic activity in the euro area suggests that the risk is that the ECB’s changes will reduce its inflation and real GDP growth forecasts. This may lead to a downward adjustment in euro area interest rate expectations against the euro,” says Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman (BBH).

Technical Analysis: EUR/USD continues to make low lows

EUR/USD has declined broadly since peaking at 1.1202 on August 26. Despite a higher reaction between September 3 and 6, the pair continued to make lower lows, most recently on Wednesday when it fell to 1.1017. Therefore, the pair is likely in a downtrend, and since “the trend is your friend”, one could argue that the odds favor lower prices, although the downtrend is not strong.

EUR/USD 4-hour chart

A break below 1.1017 would provide further confirmation of more downside, although it is now not far until the price reaches 1.1000 – a whole number and a key level of psychological support.

Further weakness could see the pair decline to the 0.618 Fibonacci retracement of the August rally at 1.0941, where it would likely find firm support.

At the same time, the risks of a recovery remain. The Relative Strength Index (RSI), for example, has risen sharply from the overbought zone, giving a buy signal, and it is still possible for the pair to recover to the 1.1150 line of key resistance highs if the counter reaction -trend. in progress persists.