The EUR/USD pair falls on the ECB message (Daily analysis 30.10.2020)

The US dollar appreciated and rebounded from last week’s losses as the second wave fears emerge. The EUR/USD pair slipped below 1.17 mark after the ECB surprised with how decisively it pre-committed to ease the policy in December.

Global stock markets are on track for the worst week since March. Eurozone’s equity indexes plunged almost 8% this week. Brent crude futures dropped by 10% as the outlook for oil demand gets gloomier and gloomier. The risk route supports the greenback (the US currency) and erases bearish pre-positioning ahead of the presidential election on November 3rd, which was built around expectations of a democratic sweep. The euro is additionally hampered by an extremely dovish outcome of the ECB meeting. The sterling trades in line with a broader US dollar trend as no major news concerning the Brexit negotiations came out. Energy markets turmoil results in underperformance of commodity currencies with the Norwegian krone experiencing the heaviest selling pressure. The yen remains supported as investors flock to safe-havens.

The euro declines on the ECB dovishness

The Governing Council left all its key interest rates, purchase and reinvestment programmes as well as liquidity provision facilities unchanged, as widely expected. However, the ECB delivered an extremely dovish message. The ECB turns out to be concerned predominantly by the economic outlook losing momentum. It pre-announced a thorough re-calibration of current policy measures as risks to the growth outlook are on the rise due to the second wave of the coronavirus pandemic. All options are in play, which means that cutting the deposit rate further into the negative territory is not off the table. As long as the ECB tweaks LTROs parameters, extends and speeds up asset purchases, but refrains from rate cuts, the euro outlook should remain positive. Especially given the recent build-up in monetary easing expectations and the fact, that lowering the deposit rate further has recently been partially priced-in. A potential democratic sweep should be perceived as a trigger that could shift the EUR/USD pair higher, and the timing of the US fiscal package will remain the main driver for the currency markets.

Record GDP numbers fail to bring some light to the markets

The growth figures for Q3 both in the United States and Europe, show a record rebound from the second-quarter weakness. The US GDP data came in slightly stronger at 33.1% driven mainly by consumption. What is more, a rapid decline in weekly jobless claims points to solid payrolls growth in October. The Eurozone’s economy grew by a staggering 12.7% quarter-on-quarter. The markets are obviously not cheered by a dump of positive macroeconomic figures. The data are just a pleasant remainder where the economies were heading before the second wave and the reintroduction of lockdowns and restrictions.