07:15 AM EDT, 10/29/2024 (MT Newswires) -- EUR/USD continues to trade close to recent lows with the United States presidential and congressional elections next Tuesday a key near-term risk event that will likely keep the dollar well underpinned and the euro under downward pressure, said Mitsubishi UFG.

However, the economic backdrop in the eurozone continues to encourage euro selling as well with no sign of an imminent turnaround in sentiment, wrote the bank in a note to clients.

The news from Volkswagen will certainly not help, MUFG said. Volkswagen plans to shut at least three of its factories in Germany, slash wages by 10% with pay to be frozen in 2025 and 2026 with plans to also abolish one-off payments to long-term employees, according to employee representatives. The closures would be the first in Germany in the company's 87-year history, stated MUFG.

An employee representative has given Volkswagen two days to retract the plans, hinting at the potential for strikes. The news from Volkswagen highlights the importance of the demand for autos in China given the ongoing struggles for automakers due to weakening demand in China, pointed out the bank. The German carmaker is aiming for a profit margin of 6.5% by 2026 but margins fell to just 2.3% in the first half of the year.

Before the COVID-19 pandemic, German cars accounted for 25% of the Chinese auto market but that share has now fallen to 15%. For electric vehicles, the drop in market share in China for German cars has been even larger. Rising costs in Germany are exacerbating the squeeze and it's clear that German manufacturing has lost competitiveness, added MUFG.

Real gross domestic product in Germany is set to contract this year for the second consecutive year.

The developments in Germany will keep pressure on the European Central Bank to continue cutting rates at consecutive meetings. This contrasts with expectations of U.S. Federal Reserve action and results in a substantial move in rate spreads, according to the bank.

The two-year eurozone-U.S. swap spread has plunged by 75bps in a little over a month to reach levels not seen since toward the end of 2022 when the eurozone was emerging from the energy price shock that hit growth severely. EUR/USD at that stage had just rebounded back above the parity level and it underlines the scale of downside risks for EUR if this spread move consolidates over the coming weeks.