EUR/USD: Recent bounce seems unjustified and could lead to falls

EUR/USD has only modestly bounced as markets lick their wounds from Monday's falls. Concerns about coronavirus, political uncertainty ahead of the elections and data are on the agenda on Tuesday, Yohay Elam, an Analyst at FXStreet, reports.

Key quotes

“Monday's market decline boosted the safe-haven dollar and the recovery is meager – a classic ‘dead cat bounce’ pattern. The lack of a meaningful pickup is due to the same reasons that pushed the pair lower – and have only worsened since. First and foremost, COVID-19 cases continue spreading rapidly across the old continent despite action taken by governments – and a massive shuttering is getting closer.”

“Infections and deaths are on the rise in the US as well, but the reaction in currencies is different – the safe-haven dollar benefits from concerns. Another factor weighing on sentiment is Congress' failure to approve a multi-trillion fiscal stimulus package ahead of the elections. Lawmakers have officially been sent home until after the vote, just after confirming Amy Coney Barret to the Supreme Court.” 

“Uncertainty about the elections also adds to pressure. With one week to go, national and state polls continue showing a considerable lead for Democratic candidate Joe Biden over President Donald Trump. Investors currently prefer a ‘blue wave’ scenario – in which Dems also win the Senate. In that case, the newly elected officials would provide massive fiscal relief. Markets seem to shrug off concerns about business-unfriendly policies down the road.” 

“Durable Goods Orders for September are set to show another advance. The data feeds into Thursday's Gross Domestic Product statistics for the third quarter. However, the lapse of government support in late July may have weighed on investment. The second figure to watch is the Conference Board's Consumer Confidence gauge for October. Economists expect an increase, yet rising coronavirus cases and concerns about the elections may have pushed it lower. Downbeat US data could trigger haven flows to the greenback.”