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Will FX Traders Care More About Election, Stimulus Or PMIs?

By Kathy LienForexOct 22, 2020 06:49PM ET
www.investing.com/analysis/will-fx-traders-care-more-about-election-stimulus-or-pmis-200542055
Will FX Traders Care More About Election, Stimulus Or PMIs?
By Kathy Lien   |  Oct 22, 2020 06:49PM ET
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In terms of economic data, Friday is the most important day this week. Markit Economics will be releasing PMI numbers for Australia, the Eurozone, UK and the U.S. These are important reports because they measure the pace of growth in the service and manufacturing sectors and provide the most timely look at how these economies are doing. From these reports, we’ll get to see how much the rise in virus cases and tighter restrictions in the Eurozone and UK curtailed activity in the month of October. By the same token, we’ll also learn how relaxed restrictions in Australia supported the economy. 
 
Yet, the real question forex traders should be asking is whether any of these economic reports matter because price action suggests that they don’t. Virus cases have been soaring in Europe for weeks now, with Germany and France reporting record highs as recently as Thursday. However, the euro and sterling traders seem to be completely unfazed, with both currencies hitting one-month highs. Theoretically, PMIs are important enough to change the trend in currencies and, with the European Central Bank meeting next week, tomorrow’s EZ PMI report may be hard for forex traders to ignore. The U.S. election is important, along with any progress on U.S. stimulus talks, but it's 12 days to the big event, and there’s still little chance of a clear resolution. The election will come down to the wire and possibly beyond it if the results are contested or there’s not enough mail-in ballots received for a majority in key states. A winner may not be declared until Dec. 14, the day electors meet in all 50 states to cast their ballots for President. Stocks are up because House Speaker Nancy Pelosi said they are “just about there” on a stimulus deal but, according to many insiders, a deal before the election is highly unlikely. 
 
While it's true that it's only a matter of time before more stimulus is provided to Americans, the prospect of major election uncertainty should be enough of a reason for investors to reduce market exposure. The tipping point could happen soon, and when it does, profit-taking in stocks combined with weaker data could lead to significant declines in currencies. In other words, the election and stimulus are important but so is data, particularly for countries where a major stimulus package is not on the way. 
 
For weeks now we’ve been writing about how EUR/USD should be trading much closer to 1.16 than 1.19. If Friday’s Eurozone PMI numbers miss, EUR/USD could head towards 1.17 quickly and aggressively. The ECB is not expected to lower interest rates next week but it could signal intentions to do so. The fact that the ECB could take aggressive measures over the next two months, when no further action is expected from the Fed, should be reason alone to sell euros. 
 
Brexit negotiations are going nowhere fast, and that reality also makes UK PMIs important. Manufacturing and service sector activity is expected to slow. If the declines are material enough, we could see GBP/USD slip below 1.30. The Australian and U.S. PMI reports tend to be less market-moving but they can also provide valuable insight into how these economies are faring. The state of Victoria ended Melbourne’s nearly two-month lockdown a few weeks ago and continues to ease restrictions as the country successfully beats COVID-19 a second time (only 22 cases were reported yesterday). In contrast, U.S. virus cases are headed towards record highs, but the reluctance to impose new restrictions keeps economic activity running. Low interest rates are also helping with existing home sales rising 9.4% in the month of September to a 14-year high. Reports like this helped to drive the U.S. dollar higher against most of major currencies on Thursday.
 
The one exception was the New Zealand dollar, which hit a one-month high. Although the Reserve Bank of New Zealand talked openly about negative interest rates, the fact of the matter is data is improving. Thanks to stronger growth in the manufacturing and service sectors, business confidence is off its low. Consumer prices for the third quarter are scheduled for release tonight and, while we are bullish on NZD data in general, the RBNZ’s dovishness could be due to concerns about low price pressures.
Will FX Traders Care More About Election, Stimulus Or PMIs?
 

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Will FX Traders Care More About Election, Stimulus Or PMIs?

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Comments (8)
Philippe Loudmer
Philippe Loudmer Oct 23, 2020 5:16PM ET
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With coming Biden landslide and blue party taking over both Senate and House of Representatives , the  Socialist largesses and free lunch-free vaccine - free healthcare - free school- free universities - free infrastructures will hit very hard the US $. I expect a breakout of the Euro , and most others currencies like JPY - CHF - GBP versus poor socialist $ .
bashar abdulwahed
bashar abdulwahed Oct 23, 2020 3:53PM ET
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really kathy.. you too much in the last 2 weeks...as euro dolar is moving always against your prediction.. i lost all my money.. really thank for your crazy analisis
Murali Brahmandam
Murali Brahmandam Oct 22, 2020 10:22PM ET
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FX rates are being determined by the relative covid infections parity called RCIP I write the theory. Kath is old bookish
Murali Brahmandam
Murali Brahmandam Oct 22, 2020 10:18PM ET
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:-)
Murali Brahmandam
Murali Brahmandam Oct 22, 2020 10:18PM ET
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NOTA none of the above. correct answer is Corona Covid situation
Chris Black
ChrisBlackforex Oct 22, 2020 5:28PM ET
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Tjanks kau
Jack Galloway
Jack Galloway Oct 22, 2020 5:13PM ET
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Where's the volume gone?
Jimmy Smith
Jimmy Smith Oct 22, 2020 5:13PM ET
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Folks are waiting to find out on November 3rd if we will remain free, or begin a hard turn towards socialism and redistribution of wealth.
Braem Dumisani
Braem Dumisani Oct 22, 2020 4:27PM ET
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USD is even hitted by ZAR 😑💔
 
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