EURUSD moves back into longs following sharp breakout

• EURUSD bulls are throwing in the towel into he close on Wall Street. 
• The US Dollar is trying to battle back into bullish territory ahead of US CPI.

EURUSD rallied in a broad risk-on setting, taking out the Monday highs for a fresh high for the week, eating into shorts from the prior. At the time of writing, the pair is ducking below 1.0096 highs into 1.0078 but remains a good 100 pips above the lows of the day.

Investors cheered the prospects of gridlock in US politics as the US midterm election voting got underway with results expected later tonight in the US hours. Investors are hoping for a political gridlock that could prevent radical policy changes and for a slowdown in the pace of rate hikes from the Federal Reserve. The UK's Telegraph explained that ''the first wave of vote tallies are expected on the East Coast between 7 pm and 8 pm EST (12 am and 1 am GMT). An early indication of Republican success could come if the races expected to be close - like Virginia's 7th congressional district or a US Senate seat in North Carolina - turn out to be Democratic. By around 10 pm or 11 pm EST, when polls in the Midwest will be closed for an hour or more, it is possible Republicans will have enough momentum for experts at US media organisations to project control of the House.''

Eyes turn to US CPI

As for the Fed, there were no officials slated during the midterm elections although there will be plenty to go on between speakers and data before the December 13-14 meeting. However, for this week, the US Consumer Price Index will be critical. It will be scrutinized and analysts at TD Securities suggested that Core prices likely slowed modestly in October but to a still strong 0.4% MoM pace.'' All told, our MoM forecasts imply 7.9%/6.5% YoY for total/core prices.

'A below consensus print is likely to help push the pricing for the terminal funds rate modestly lower, likely bull steepening the curve in the process,'' analysts at TD Securities argued. ''The risk of a lower reading is why we took profit on our 2s10s curve steepener last week and went long 10y Treasuries, which we viewed as attractive,'' they said.  

EURUSD a fade on rallies

Analysts at Rabobank would argue that the Euro is lofty and rallies would be a fade considering the various macro implications for the eurozone economy and the length that is being built up in speculative positioning. ''The latest CFTC speculators’ positioning data have showed a sharp ramping up in the levels of net EUR longs over the past two weeks, to the highest levels since June last year. ''

''The positive sentiment surrounding the EUR in late October and into the first day of November reflects the impact of both the 75 bps rate hike from the ECB last month and the relief that came from the falling back of European gas prices in October.  Helped also by a broadly softer greenback in recent days, EUR/USD is currently testing parity and pushing up against its 100 day sma.  A break above could encourage more buyers in the near term.'

''However, in our view, fundamentals are still bias towards further downside pressure for the currency pair in the coming months, meaning we would view rallies as an opportunity to sell.  In particular we don’t see the EUR as being priced for the impact of winter 2023 and what a prolonged period of expensive energy may mean for the German business model, Europe’s trade and current account balances and the value of the EUR. We have revised lower our forecast for EUR/USD on a 12 mth view to 0.95 from 1.05.  We expect EUR/USD to trade choppily around this level in the months ahead.''