The European Central Bank left monetary policy unchanged today but euro sold off aggressively after President Lagarde confirmed that more easing is on its way. They are looking to recalibrate all instruments at their next policy meeting according to the ECB President. We thought there was a small chance of a proactive move at today’s meeting but the central bank will be using the next six weeks to assess how much stimulus is needed, the effectiveness of nationwide lockdowns in Europe, and the outcome of the US election. Had they eased today, European markets would have soared but any positive market flows could disappear on US election day. In order to ensure that their actions had a durable impact on European assets, it is indeed smarter to wait for a time when their potency isn’t diluted by bigger stories.

ECB President Lagarde said that while Friday’s third-quarter GDP numbers could be better, “the rise in COVID-19 cases and the associated intensification of containment measures is weighing on activity, constituting a clear deterioration in the near term outlook.” The outlook is so dire that she said they can’t rule out a contraction in the fourth quarter. France’s Ministry of Finance head Le Maire predicts a -15% contraction in their economy as a result of the latest lockdown. There’s “little doubt” that more stimulus is needed as they “will be looking at (recalibrating) everything.” By December, they’ll have the data to update their economic projections which will help decide if another massive stimulus package is needed. At a minimum, they’ll need to expand their asset purchase and pandemic emergency purchase programs. They’ll also need to adjust TLTRO terms but what the market really wants is an interest rate cut. However, rates are at record lows already and a further decline may not have much impact on the economy.

For FX traders, the big question is how much downside there is in euro. With the big event behind us and Q3 GDP due tomorrow, we could see EUR/USD bounce in the next 24 hours. Today’s decline stopped right at the 100-day SMA, which is a key level of support. Next week we should see some more risk aversion on Monday and Tuesday but after that, how currencies trade hinges entirely on the outcome of the election. A clear landslide victory by either candidate would be less disruptive than an uncertain result.

Meanwhile, a stronger than expected US recovery in the third quarter helped to drive the dollar and stocks higher. President Trump also promised a big stimulus package after the election. Regardless of who wins, more stimulus is on the way. While European governments are moving fast to contain the virus in their countries, daily new infections in the US hit its third-highest level ever. The lack of containment measures in the US means there’s no end in sight. The current administration hopes for a vaccine and medical solution but before that becomes widely available, the numbers will worsen jamming hospital systems across the nation. Personal income and spending numbers are due for release on Friday – while they could give USD/JPY a lift, gains are limited ahead of the election. We continue to lock for de-risking which means further losses for EUR, AUD and Yen crosses.