EURUSD is back testing the lows of the day towards parity, US CPI will be crucial

EURUSD has dropped on the day by over 0.4% in a volatile session in New York that has seen good two-way business in the forex market. The US dollar advanced on Wednesday, as results so far for the midterm elections showed little evidence of a "red wave" resounding Republican victory. However, it was a wild ride between NY session lows and highs of 109.727 and 110.373 which pushed and pulled the Euro. 

In US politics, a stronger showing by Republicans was expected to have fanned the flames of speculation around prospects of less fiscal support and potentially a lower peak in the Fed's terminal rate. This initially drove an offer into the greenback and subsequently supported the Euro on Friday and at the start of the week within its trading range of 0.97-1.01 for the month so far. However, the prospect of a divided US Congress and the expected Republican Red sweep seems not to have materialized. Consequently, Wall Street opened offered and remains in the red in the latter part of the session, bearish for the Euro. 

Analysts at Rabobank argued that there is more downside to come for the single currency. ''In our view, fundamentals are still biased towards further downside pressure for the currency pair in the coming months, meaning we would view rallies as an opportunity to sell,'' they said.

''In particular, we don’t see the EUR as being priced for the impact of winter 2023 and what a prolonged period of expensive energy may mean for the German business model, Europe’s trade and current account balances and the value of the EUR. We have revised lower our forecast for EUR/USD on a 12 mth view to 0.95 from 1.05.  We expect EUR/USD to trade choppily around this level in the months ahead.''

As for positioning, the latest CFTC speculators’ positioning data have shown a sharp ramping up in the levels of net EUR longs over the past two weeks, to the highest levels since June last year. This leaves room for a correction should the US Dollar manage to catch a bid again that has retreated from multi-decade highs in recent weeks as investors take profits following a months-long rally.

US CPI will be key for USD

There has been growing speculation grows that the Fed may be inching closer to pulling the curtain on its dollar-supporting interest rate hikes and such a pivot would be highly supportive of equities and all things high beta, such as the Euro and the commodity complex. In this regard, investors are waiting to see whether Thursday's US Consumer Price Index data will spur the Federal Reserve to continue to increase interest rates well into next year. After all, the Fed Chair, Jerome Powell, pushed back against the recent pivot sentiment and market rally at the last presser when he said the terminal rate could be higher. In any case, Thursday's inflation report could be a good litmus test to gauge whether investors are about to turn their backs on the greenback once and for all.

EURUSD eyed at 0.9500 end of year

In their outlook for the Euro, analysts at Noredea said, ''EURUSD will likely continue to have a bumpy ride but we still hold our view for a lower EURUSD towards the end of this year (around 0.95).''

''What we are seeing now is that investors are becoming more divided when interpreting economic data and implications for monetary policy. Confirmation bias surrounding the incoming data makes some certain of a Fed pivot even if the data shows otherwise.''

''Several central banks slowing the pace of hikes has led to a belief that rate cuts are not far away either. Some are emphasizing the risks of overtightening, however, the Fed sees a risk of not tightening enough or pausing too early to bring inflation under control.''