Analysts’ Pick: Will the Fed and ECB’s upcoming meeting minutes open up some potential downside for EUR/USD?
- FOMC’s meeting minutes to reiterate dovishness, but more likely to be closely watched for dissent among policy makers following an 8-2 September vote
- Lagarde’s post monetary policy speech was surprisingly optimistic, opening up room for the euro to fall on potentially dovish statements within the ECB’s meeting minutes due to increasing downside risks in the bloc
- Short-to-medium-term outlook for EUR/USD tilted towards the downside, due to expected increased volatility ahead of the elections and meeting minutes dynamics
- Downside may be limited in the longer -term, as we expect demand for the dollar to fade post-elections
The incoming meeting minutes from both the European Central Bank (ECB) and Fed may not be the strongest driver for currencies this week, but investors and traders will be looking to both for more details on both central bank's last meetings. For the Fed's last monetary policy meeting, the concern will be on the conflicting views among Fed officials and subsequently the disparity in outlooks between Fed officials, which could lead to a less-than-dovish overall stance from the central bank. The Federal Open Market Committee (FOMC) voted 8-2 at last month's monetary policy meeting, highlighting the difference in opinion, likely regarding the more explicit forward guidance of the Fed's latest statement in particular on: "With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent". This would suggest that while the Fed's new average 2% inflation target is more dovish than before, it may not be too extreme as more Fed officials may be conflicted on the boundaries of the framework. Consequently, we expect the Fed's September meeting minutes' dovishness to be offset by some contrast in opinions and outlook between officials.
As for the ECB, President Christine Lagarde's relatively optimistic tone at her press conference post September's meeting is likely to spark some concern among economists and investors that were expecting more dovish language from the bank as the EU battles a second wave of Covid-19 cases and weakening economic indicators. We expect some dovishness from the meeting minutes, in the form of growing downside risks in relation to economic activity in the EU starting to peak, while rising Covid-19 cases reintroduces the possibility of renewed lockdown restrictions - which we've seen already play out in member countries such as France.
Covid-19 cases continue to climb in the EU, adding downward pressure to the already damaged economy
Bloomberg’s alternative factor model for economic activity shows a more gradual recovery in EU member countries from August compared to the US
More important drivers for the EUR/USD currency pair will be the US general elections and the economic recovery of both EU countries and the US. At this point, the short-to-medium outlook for EUR/USD appears to be skewed towards the downside, as volatility and downside risks is more likely to tilt in favour of a stronger dollar. As we've seen play out earlier this week, the likelihood of the US passing a new fiscal stimulus package ahead of the elections appears to be low. More specifically, the dollar has seen some renewed demand for its safe haven properties following US President Donald Trump's announcement to halt stimulus negotiations with the Democrats. Regarding the stimulus front, while there may have been progress in negotiations last week, incentives for both parties continue to look more likely to be more inclined to wait until after the elections before passing it, especially as both parties remain far apart on details of a package. While a prolonged period of depressed markets may mitigate some of this, it is unlikely to realise into a compromise between lawmakers due to incentives of both parties in waiting until after the elections to pass a package. In addition. we expect more volatility to come due to the increased uncertainty regarding the presidential elections, which may spill over into the post-election period in the event of a Democrat victory during mail-in voting counts following a Republican win during in-person voting tallies.
Dollar demand has in part been fuelled by news surrounding stimulus negotiations between US lawmakers
Hence, our short-to-medium-term outlook for EUR/USD remains tilted towards the downside, due to stronger prospects for the dollar in a high volatility environment while weakening prospects for the euro due to a slowing recovery in the European economy and potential dovishness from the ECB. EUR/USD may as a result fall closer towards 1.1611's level. However, downside may be limited due to the EUR/USD being in an overall longer-termed uptrend, which is further cemented by impending risks that the dollar faces due to the high levels of stimulus and probably weakening of the greenback with inflation in the US primed to rise by the Fed's actions
While we fundamentally see some downside in the short-to-medium-term outlook for the EUR/USD currency pair, it is good to note that it is still trading well above its 200-day moving average and appears to have bottomed out in a longer-term horizon. That said, bears are likely to contest over short-term possession of the euro dollar, which may see some profit taking from long positions especially as we see the currency pair trading right at the recent triple bottom at 1.1756’s level. A MACD crossover may also be a signal of some additional slight downside in the short-term. Over a longer-horizon, the overall trend for EUR/USD still appears to be more bullish than bearish, suggesting that momentum may limit short-term downside.
Support: 1.1702 / 1.1611 / 1.1472
Resistance: 1.1804 / 1.1900 / 1.2012
EUR/USD Chart (H4)