EURUSD hold top of range with 1.15 in sight
The euro is holding the top of its range against the US dollar as traders despite no agreement yet reached on the EU’s €750bn recovery fund. Markets are holding out hope that an agreement can still be reached in the coming weeks or months - an event that should see EURUSD trade even higher.
The sticking point in negotiations is the portion of the recovery fund that will be handed out as grants rather than loans. The “frugal four” - that’s Sweden, Austria, Denmark, and the Netherlands - are resistant to a shared debt burden, preferring nations repay loans with a small interest rate. This fiscally-conservative faction requested only €350bn be handed out as grants rather than the proposed €500bn.
Although the negotiations are delaying the deal, it’s a promising sign that a compromise can be reached soon.
Strength in EURUSD right now isn’t just a euro story though, it’s also a US dollar story. Not only does Europe’s better handling of the coronavirus make the shared currency and European assets relatively more appealing, but the USD looks like it’ll trade weaker into the November presidential elections.
An immediate level to watch is 1.1447 - daily resistance since last Wednesday. A daily close above here would be the encouragement needed for a move towards 1.15, at which EURUSD last traded in January 2019. Such a move could be a catalyst to shake up global markets, as it would likely propel a weakening USD towards the 95 handle on the US dollar index (USDX), increasing selling pressure on the USD.
Euro trades to top of range - what’s next?
The euro is back at the top of its range against the USD as traders get a better feel for the shared currency. Not only could Europe be closer to fiscal unity in form of the €750bn recovery fund, but the region is preparing to re-open economies while across the Atlantic the USA is reporting record daily case counts and battered states pause reopenings. From that perspective, the euro has a relative appeal right now.
Euro traders are looking ahead to the EU Council meeting on Friday, where progress is expected on the €750b recovery fund. The fund proposes fiscal support in the forms of not only loans but also grants, a step towards the fiscal unity that France and Germany are calling for. Although we’re unlikely to get a final decision, an indication that the EU’s fiscally-conservative faction is open to the idea could pave the way for a decision later in the year. Progress here should be positive for the euro, but if decisions run into the weekend, markets won’t react until Monday.
EURUSD rose almost 0.5% yesterday from 1.1343 to closing just below the 1.14 handle. This morning in the early asian session, the euro pushed above 1.14 USD. The big question for euro traders: Will the euro once again find sellers at this level or is EURUSD about to break above the range to fresh highs?
It’s a pivotal point, so I’m watching how today’s daily candle shapes up. A close above 1.14 could encourage euro bulls into the market, whereas a close below 1.14 could inspire selling towards the bottom of the range.
Tomorrow’s ECB meeting should be a low-vol event after a big meeting last month. Tomorrow’s ECB meeting should be a low-vol event after a big meeting last month.
When will the euro rally end?
The euro rallied again overnight after the ECB exceeded expectations with significant expansions to its PEPP program. But after such a strong rally, the big question is when EURUSD rolls over again.
The euro’s been boosted over the past week and a half not only by economies reopening and USD weakness, but also as the EU looks more united on a fiscal recovery and now a heavier response from the European Central Bank (ECB).
Markets were expecting an increase to the €750bn Pandemic Emergency Purchasing Program (PEPP) of about €500bn. The ECB surprised at yesterday’s meeting, expanding the program by a massive €600bn to a total of €1.35tn. It’s a staggering amount, and at current purchase rates of about €100bn per month, extends the program until June 2021.
Usually quantitative easing (QE) measures are currency negative, as large-scale asset purchases increase the currency supply available to markets. In this case though, the ECB looks to be ahead of the curve and ready to support the euro area with whatever it takes, so markets have responded favourably.
The big question is where to next for the euro, and does it roll over soon?
An immediate concern for me is that the significant ECB action could hurt progress on the EU recovery fund. The more the ECB acts, the more EU nations can sit back and resist debt mutualization. Yesterday I mentioned the “frugal four” that have opposed the idea of EU recovery grants instead of loans. Well, Finland has since joined the club with its own objections to the recovery fund.
Relative USD weakness is also key to watch here. We’re watching today’s nonfarm payroll number and US unemployment rate to consider the USD’s next move. Unemployment for May is expected to print at 19.8% tonight, up from 14.7% in April, while nonfarm payroll figures are expected to reveal more than 8million job losses in April. Any surprises of a stronger than expected labour market here could encourage US stocks to rally further and could help the USD recover some of its lost ground. A stronger USD probably means a weaker euro, and EURUSD might finally roll over. Of course, the data could also be worse than expected and weaken the USD further. It's absolutely one to watch - and you can monitor it with our economic calendar.