EUR/USD Forecast: Why the euro is ready to recover from Trump's blow (for now)

Who's right, technicals, or fundamentals? EUR/USD was hit hard by President Donald Trump, who abruptly announced the end of stimulus talks with Democrats on Tuesday. The presidential proclamation sent stocks down, and the safe-haven dollar higher. Can it recover?

Before talking about the technicals, here is the fundamental case for a bounce in the euro. First, the president seemed to be regretting his move. After seeing US markets close at lower ground, he tweeted his support helping airlines, payrolls protection, and sending stimulus checks to all Americans – with his name on signed on them. 

See Who will be the next president? Markets seem to care more about Congress' actions (for now)

The economy was the only point where Trump competed with rival Joe Biden and he may have also come to terms with the electoral damage of the breakdown in talks. Tuesday was a horrible polling day for the incumbent, with both national polls and state ones pointing to Biden broadening his lead and nearing a landslide victory.

According to FiveThirtyEight, Biden has an 82% chance of winning, and The Economist gives Trump only 10% of being re-elected. RealClearPolitics shows the former VP leading by 9% and betting odds rising to the highest margin yet. 

Source: RCP

Will he change his mind on stimulus? If negotiations resume, equities could rise and the safe-haven dollar could fall.

Trump continues his recovery from his COVID-19 episode in the White House, and his doctors say the Commander-in-Chief is "not reporting any symptoms." However, the president has yet to make a live public appearance – he has only released videos so far. 

Around 210,000 Americans have died of coronavirus and Trump's hospitalization has likely cast the spotlight on the topic. Vice-President Mike Pence, who leads the White House's COVID-19 taskforce, will debate VP-candidate and Senator Kamala Harris late in the day. With polls swinging strongly toward Biden, a calm performance by Pence could contribute to mean-reversion and a tighter race.

See VP Debate Preview: Preventing a landslide Trump loss? Pence may win Harris, narrowing the race

Investors prefer a clear outcome and a larger fiscal relief package – something that a clean sweep for Democrats can provide. If Pence is seen as the winner, stocks could slide, and the safe-haven dollar could rise – but that happens only early on Thursday. 

Beforehand, EUR/USD will rock according to fiscal stimulus news and also central bankers. Christine Lagarde, President of the European Central Bank, said on Tuesday that her institution does not target the exchange rate, reiterating known positions. She also expressed concerns about the recovery. Lagarde speaks again on Wednesday, but is unlikely to say anything new to weigh on the common currency – her worries are already priced in.

The same logic applies to the other side of the pond. Jerome Powell, Chairman of the Federal Reserve, called on lawmakers to act and expressed fears about a slowing recovery in a speech on Tuesday. The Fed's meeting minutes, due out on Wednesday, will likely echo the same messages.

In theory, the protocols only document the mid-September rate decision, but it is essential to note that the minutes are revised until the last moment to send a message to markets. In this case, the bank would not want to be seen as dropping a bombshell ahead of the vote. 

See US Federal Reserve Minutes Preview: Rate cuts, stimulus, and more stimulus

All in all, EUR/USD has room to bounce as depressing developments are already in the price – at least during Wednesday. 

EUR/USD Technical Analysis

Euro/dollar has been setting a series of higher lows and higher highs – and uptrend. It continues benefiting from upside momentum on the four-hour chart and also held up above the 50 Simple Moving Average. 

All in all, the picture is bullish. 

Resistance awaits at 1.1770, which was a high point last week. It is followed by 1.1810, which is the weekly high, and then by 1.1830 and 1.1870. 

Support is at the daily low of 1.1725, followed by 1.1685, which was a stepping stone on the way up last week. Further down, 1.1625 and 1.1610 await EUR/USD.