Euro to Benefit from Improving Market Risk Perception (Euro Open)

The US Dollar jumped 125 pips higher against the Euro as Barack Obama won enough electoral votes to become the next President of the United States. However, EUR/USD is likely to rise as improving risk sentiment remains the driving force behind forex price action in the near term.

Key Overnight Developments

• UK Consumer Confidence Unexpectedly Rises in October
• Australian Trade Surplus Widens as Exports Surge
• US Dollar Rises as Barack Obama Clinches Presidency

Critical Levels 

The Euro sold off late into the overnight session, retracing about half of its gains in US hours to find support at 1.28. The British Pound followed suit, falling over 200 pips to find support near the 1.58 mark.

Asia Session Highlights 

UK sentiment was unexpectedly upbeat in October as Nationwide Consumer Confidence printed at 55 versus forecasts of 47 and 51 in the previous month. The metric registered its first positive result since December 2007 as consumers responded to interest rate cuts and the passage of emergency measures to stabilize the banking sector. The Bank of England is expected to slash rates by another 50 basis points tomorrow to offer further stimulus as the economy inches towards recession after GDP shrank -0.5% in the second quarter.

Australia's Trade Balance surprised sharply to the upside, showing the surplus widened to A$1460 million in September A$1364 million in the preceding month. Economists' forecasts had predicted a meager A$500 million result. Exports surged 7.5%, the most in 4 months, driven by shipments of coal (9.8%) and iron ore (14.31%). Slowing worldwide demand is being offset by a sharply weaker Australian Dollar, making Australia's goods comparatively cheaper and thereby attractive to foreign buyers. Indeed, the Aussie lost -6.6% against an average of 7 top global currencies. Still, exports could slow significantly over the coming months as the global economic slowdown deepens. The CEO of mining giant Rio Tinto recently pointed out that "the slowdown in Chinese economic growth is quickening and demand…won’t rebound until 2009” while RBA Governor Glenn Stevens warned of "significant weakness in the major industrial economies and...further signs that China and other parts of the developing world are slowing." This will continue to weigh on commodity prices, shrinking revenues from Australia's key exports. It remains to be seen whether this or continued Australian dollar weakness will prove to be the dominant force affecting trade figures, with the Aussie pressured lower by another 100-125 basis points in interest rate cuts priced in for the next 12 months.

The US Dollar jumped 125 pips higher against the Euro as Democratic Party candidate Barack Obama won enough electoral votes to become the next President of the United States. The move likely owes to easing uncertainty over the election outcome.

Euro Session: What to Expect 

The pace of decline is expected to remain unchanged for UK Industrial Production, with forecasts putting the metric at -2.3% in the year to September. Meanwhile, Manufacturing Production is seen showing slight improvement as the slide there slows to an annualized -1.6% in September from -1.9% in the preceding month. Both readings are likely to benefit from the cheaper British Pound. Indeed, the currency slid nearly 2% against the US dollar in September, making goods priced in Sterling cheaper and spurring overseas demand. The sharp drop in oil prices also helps, reducing firms’ production costs.

Matters are far less rosy in the Euro Zone, where September Retail Sales are seen falling -0.3% in September to bring the annualized rate of decline to -2.2%. Europeans have noticeably shied away from spending as economies of the 15-nation currency bloc barrel towards recession. Consumer confidence has fallen to the lowest levels in 18 years and GDP shrank -0.2% in the second quarter. The European Central Bank is expected to cut interest rates by 0.50% in an attempt to stabilize economic growth.

On balance, improving risk sentiment is likely to be the driving force behind forex price action in European trading hours. We have recently noted an impressive inverse correlation between the US dollar and global stock performance (as captured by the MSCI Index) as improving financial market conditions embolden bargain hunters to push some capital back into risky assets. This correction of the oversold conditions forged at the height of the credit crunch should see the US Dollar move lower in the near term before the long-run bullish trend resumes. Indeed, today saw EURUSD surpass key resistance, opening the door for substantial upside in the days ahead.

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To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.