The euro managed to recover from a 2-month low against the dollar and has traded extremely narrowly around the 1.2800 mark, while Wall Street and European markets rose despite a string of weaker than expected data as investors focus on the U.S. presidential election.
In the United States, presidential polls indicate an election that remains too close to call, although President Obama has a small lead.
Euro hovers around 1.2800, U.S. election eyed
The euro held pretty steady around 1.2800 as investors awaited the results of a close U.S. presidential vote, despite uncertainty over whether Greece will approve more austerity measures on Wednesday needed to secure next financial aid payment.
EUR/USD rose to a daily high of 1.2819 at the beginning of the New York session, and it was last flat at the 1.2805, having bounced from a low of 1.2763. The short-term outlook however, has turned more bearish after losing the 200-day SMA support (1.2825), with the 38.2% retracement of the broader 1.2041/1.3172 rally at 1.2740, as next target.
However, no major movements should be expected until the elections outcome. "For today, at least, it appears that markets will take advantage of a brief reprieve from the U.S. and European news flows", says the Wells Fargo team. "The more favorable trend for equity markets and foreign currencies may not last too long however, with U.S. political leaders to begin budget negotiations shortly after the election, aimed at avoiding the fiscal cliff".
According to Wells Fargo, past experience suggests those budget talks will be challenging and that markets may be entering a more uncertain phase (an environment that would be negative for equities, but positive for the dollar and yen).
Meanwhile, John J Hardy, Head of FX Strategy at Saxo, notes that as the odds seem to be tilting heavily in favor of an Obama win, it remains to be seen whether the EUR/USD move lower holds through to the other side of tonight's results. "But again, the USD picture is muddled at the moment, as the G-10 smalls have been ripping stronger, likely as the market considers an Obama victory a win for sustained Fed activism and no real change in policy and therefore further cause to sell the money printers and buy the higher yielders", he says. "So if we get a trade the rumor, cover-the-trade-on-the-fact kind of setup here, we might expect the move higher in G10 smalls to reverse course, though I would only expect that to happen if the market decides to dump risk after the results roll in as the unknown of the fiscal cliff looms".