Forex market update: EUR/USD Rises Sharply Ahead of U.S. Elections

Key points:

1. EUR/USD rose to around 1.0900 as the U.S. dollar faced heavy selling pressure ahead of the U.S. presidential election and the Federal Reserve's upcoming policy decision.
2. Recent polls show Kamala Harris with a slight lead over Donald Trump.
3. The Fed is expected to announce a rate cut on Thursday, but at a slower pace than September's 50 basis point reduction.

EUR/USD Surges to Key 1.0900 Resistance as Dollar Weakens

Forex market update: EUR/USD surged to test the key resistance level of 1.0900 during Monday’s North American session, bolstered by rising uncertainty ahead of the U.S. presidential election on Tuesday and the Federal Reserve's policy meeting later this week.

The U.S. dollar started the week on a weaker footing, with the U.S. Dollar Index (DXY) dropping below 103.70. Market participants are positioning for a closely contested race between former President Donald Trump and current Vice President Kamala Harris, adding to the dollar's bearish momentum.

US Dollar Faces Sharp Sell-Off After Poll Shows Harris Leading Trump in Iowa

The U.S. dollar saw a sharp sell-off following the release of the Des Moines Register/Mediacom Iowa Poll, which showed Kamala Harris leading Donald Trump by three points in the key swing state. This marks a significant shift from September, as Trump had won Iowa decisively in both 2016 and 2020. According to Reuters, the poll result added to the uncertainty surrounding the U.S. election, driving volatility in the currency markets.

Traders generally view a Trump victory as favorable for the U.S. dollar and Treasury yields, as his proposed policies—such as raising tariffs on imports and cutting taxes—are expected to boost inflationary pressures, prompting the Federal Reserve to adopt a more restrictive monetary stance. In contrast, a Harris win is seen as a continuation of current policies, which are considered more supportive of risk-sensitive currencies, including the euro and emerging market assets.

Meanwhile, the Federal Reserve is scheduled to meet on Thursday to decide on interest rates. However, the Fed's decision is expected to be overshadowed by the election outcome. Market participants have already fully priced in a 25 basis point rate cut, which would lower key borrowing rates to the 4.50%-4.75% range, according to the CME Fedwatch tool.

Investors are closely watching for the Federal Reserve's guidance on monetary policy for its final meeting of the year in December. Markets widely expect the Fed to announce a 25 basis point rate cut next month.

On the economic front, attention will turn to the U.S. ISM Services Purchasing Managers’ Index (PMI) for October, due on Tuesday. The PMI is projected to come in at 53.5, down from 54.9 in September, indicating continued expansion in the services sector, though at a slower pace.

Conclusion:

EUR/USD surged toward the 1.0900 level, benefiting from the U.S. dollar's weakness and the euro's robust performance. The euro has gained strength since last week, driven by a series of positive economic reports from the Eurozone that reduced expectations of the European Central Bank (ECB) implementing large rate cuts in December.

Eurostat reported that the Eurozone economy grew at a faster-than-expected pace in the third quarter, prompting traders to scale back their bets on a significant 50 basis point rate cut by the ECB at its upcoming policy meeting. Additionally, inflationary pressures in the Eurozone picked up, with October's flash estimate showing inflation at 2%, further diminishing the likelihood of aggressive rate cuts by the ECB. These factors have provided strong support for the euro, helping it outperform the dollar.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.