Euro rebounds as midterm wins weigh on dollar and markets reprice fiscal outlook

USD:

Expected fiscal restraint after the Democrats won the US midterm elections has put the US dollar under pressure.

The move comes with the market stretched: being long the dollar has ranked among this year's most crowded trades, which leaves it exposed to sharp reversals whenever macroeconomic conditions shift.

Attention now returns to the US-Iran negotiations and to US economic releases. A diplomatic breakthrough could weigh on the greenback again, through softer inflation worries and rate-hike expectations.

Escalation, by contrast, might first help the dollar via risk-off flows, though in time it could drag once growth fears replace growth concerns.

EUR:

For the euro, the ECB left interest rates unchanged, as most had anticipated, yet President Lagarde disclosed that officials did debate a hike at the October meeting before opting to wait for further information.

Lagarde also indicated that should incoming data confirm the present inflation assessment, the direction of travel is fairly clear — namely more tightening. Markets already price a 72% chance of a December rate hike.

Friday brings a tentative vote on the revenue portion of France's budget, already postponed a couple of times and liable to slip again. The vote on the full budget is set for November 17. It matters as a test of whether the government can deliver fiscal consolidation.

Clear passage would bring some relief and might lift the euro, whereas rejection, or concessions big enough to dilute the deficit-reduction plan, could press further on French bonds and on the euro.

EURUSD technical analysis – daily timeframe

EURUSD is trading at a resistance zone near 1.1280. Sellers may be expected to step in there, with risk defined above the level, aiming at a break under 1.1067. Buyers, meanwhile, need the price to break higher before piling in for a rally toward the major downward trendline near the 1.1500 handle.

EURUSD technical analysis – 4 hour timeframe

An upward trendline defines the bullish momentum. On a pullback, buyers may be expected to lean on that trendline with risk below it, still targeting fresh highs. Sellers, in contrast, want a break lower to add bearish bets toward new lows.

EURUSD technical analysis – 1 hour timeframe

Little can be added here: sellers get a better risk-to-reward setup around resistance, while buyers will be watching for a breakout or a bounce around the trendline to target new highs.

UPCOMING CATALYSTS

Today brings the US ADP report and the ISM Services PMI. Tomorrow sees the latest US Jobless Claims figures. Friday closes the week with the US NFP report and the University of Michigan consumer sentiment survey.