The EUR/USD hit a new two-week high of 1.1473 during the US election night before consolidating in the mid-1.1400s. Republicans retained the Senate and Democrats won the House as expected, but it was quite dramatic.
Early on, Democrats seemed to be on course for a landslide, and the greenback dropped. The odds turned against them later on, and Republicans were in reach of retaining the House. The US Dollar bounced back and the EUR/USD temporarily fell below 1.1400. As time passed by, Democrats gained more and more seats and the US Dollar fell back down.
While the result was expected, a divided government will make Trump’s life more complicated. He will face fierce opposition if he wants to enact more tax cuts and will face investigations on his business dealings.
At the moment, markets are moving on after the limited reaction and it’s back to the known topics.
1) Italy: The clash between Italy and the European Commission over the budget deficit continues. Italian Economy Minister Giovanni Tria expressed optimism for a compromise, but there are no details.
2) Brexit: Another factor moving the Euro comes from across the channel: Brexit negotiations have reached crunch time. Optimism for a deal, even as soon as this week, prop up the Pound and also support the Euro. Developments on this front are eyed.
3) Monetary policy divergence: Last but not least, monetary policy divergence remains the underlying driver and it is not favorable for the pair. The European Central Bank lags behind the Fed in its withdrawal from the stimulus. More importantly, recent signs of weakness in the euro-zone endanger the ECB’s path for raising rates in September 2019 and may even result in a fresh TLTRO program, injecting more money into the economy as the QE program concludes by year end.
