The virus has had a surprising resurgence in Europe prompting aggressive responses from some governments in recent days. George Saravelos, a Strategist at Deutsche Bank, analyzes how recent developments impact EUR/USD. The key variable to watch is stabilization in virus numbers over the next couple of weeks. Provided that happens, the researcher continues to believe the US election combined with a potential vaccine announcement is more important as a market driver for the rest of the year.  

Key quotes

“The key variable to watch in the coming weeks is not the severity of restrictive policies in Europe but how effective they are in reducing virus incidence. Equally, in the US, we should be concerned about accelerating cases in the absence of measures to control them.”

“While the European Central Bank just now has made clear its willingness to extend easing measures in the December meeting, there is very little it can do to force European rates even lower. Another 10bps cut to the deposit rate is already priced (which we think is unlikely due to its costs) and GDP 5y5y weighted yields are already at record lows.”

“From a European perspective, what matters is if the latest round of restrictions to activity work. Ireland, the Netherlands and Belgium are the countries that have had the worst virus accelerations and been the earliest to respond. The Irish lockdown already is working, but we need to see improvements in Belgium and the Netherlands over the next two weeks to feel more comfortable.”

“Over the last month we have been emphasizing a broadly weaker dollar view, more so against high-beta and EM FX rather than the euro. It is the powerful negative mix of easy monetary and fiscal policy in the US and the prospect that this accelerates further after next week’s Presidential election that will dominate as the key driver of the dollar over the next two months. The key thing for Europe is that the virus numbers are brought back into control and that we don't see a repeat of the Great March Shutdown. In the meantime, the US election next week is more important.”