What Volkswagen Has to Do With The Eurozone Weakness?

Economic data releases and political events over the coming months could drive the EUR/USD currency pair lower. A key factor is the potential outcome of the US presidential election, specifically the possibility of a victory for Donald Trump and a Republican-controlled Congress (commonly termed a “red sweep”). If this scenario materializes, it could significantly affect the EUR/USD exchange rate. The analysis draws on historical data from the 2016 election, where a similar outcome led to a 4% decline in EUR/USD, underscoring how political shifts in the US can trigger strong market reactions. The anticipation of Trump-led policies—often seen as more protectionist and likely to stimulate US-based economic growth—tends to strengthen the dollar, potentially putting further downward pressure on EUR/USD.

Key Markets Before and After Trump got Elected in 2016

 Source: Google Photos, MacroHiveKey Drivers of a Bearish EUR/USD Outlook

1. Diverging Central Bank PoliciesOne of the most influential factors currently shaping the EUR/USD outlook is the divergence between the European Central Bank (ECB) and the US Federal Reserve (Fed). The ECB has recently adopted a more dovish stance, reflecting concerns over sluggish economic growth and persistently low inflation across the Eurozone. Weak economic indicators from the Eurozone continue to signal an underwhelming growth trajectory, putting pressure on the ECB to introduce more accommodative policies, such as extending quantitative easing or keeping interest rates lower for an extended period.

Meanwhile, the Fed’s approach is more cautious and data dependent. Strong recent US economic data, including robust employment numbers and steady consumer spending, have diminished the likelihood of a near-term rate cut, signalling a comparatively tighter policy stance than that of the ECB. This policy divergence reduces the interest rate differential between the two regions, traditionally favouring a stronger dollar and a weaker euro, thus putting pressure on EUR/USD to move lower.

2. Upcoming Economic Data as CatalystsInvestors are closely monitoring upcoming economic data releases from both regions, as these could shape expectations for future policy actions by the ECB and the Fed. In the Eurozone, upcoming GDP growth and inflation figures are of particular interest, as they will shed light on the ECB’s potential moves. Should the data reveal further economic deceleration, markets may anticipate additional easing from the ECB, further weighing on the euro.

In the US, key indicators like the Personal Consumption Expenditures (PCE) price index—a primary measure of inflation—along with employment figures, will be closely watched by investors for signals on the Fed’s policy trajectory. However, certain factors, such as ongoing labour strikes in key industries and seasonal weather changes, may dampen the impact of this month’s US labour data, making it less of a definitive indicator for the Fed’s actions.

Key Economic Releases for EUR and USA for the Week 28/10 to 01/11

 Source: Finlogix Economic Calendar3. Political Uncertainty and Market VolatilityPolitical events in the US add another layer of uncertainty, as markets typically respond to shifts in anticipated policies. A potential Trump victory could bring policy shifts aimed at boosting US economic growth through domestic spending and a more protectionist trade stance. Such a scenario often leads to a stronger dollar, as investors bet on a favourable economic climate for US assets. Given the effect of a similar scenario in 2016, a “red sweep” could once again spark a significant rally in the dollar, sending EUR/USD lower.

Investor Sentiment and the Broader Outlook

Market sentiment is highly sensitive to this mixture of economic and political factors, with many investors expecting further selling pressure on EUR/USD leading up to the US election. While near-term economic data may cause minor fluctuations, the primary factors—the potential for a Trump victory and the ECB’s dovish position—are seen as central to the currency pair's likely downward trend. In summary, unless there is a marked change in either the ECB’s or Fed’s stance or a significant shift in election dynamics, EUR/USD could face sustained downward pressure as these conditions continue to unfold.

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