Nearly universal rebound of the euro

5 May 2020

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With the exception of the EUR/GBP pair, which posts a week-on-week drop of -0.40%, the euro made a generalised rebound against its main counterparts, after being put under pressure during the week preceding 28 April. The euro shows its strongest rise against the US dollar (+1.40%) and the Canadian dollar (+0.80%). Bringing up the rear is EUR/CHF, with a rise of only 0.20%. The pair is anaesthetised to a certain extent by the Swiss National Bank's (SNB) repeated interventions on the currency exchange market. The European Central Bank's (ECB) latest announcements during last Thursday's session reassured operators about the European dynamics, although the political risk in Europe is far from off the radar.

To everyone's surprise, the ECB's meeting did not merely consist of an educational exercise to explain the panel of measures adopted since the beginning of March to address the health and economic crisis. It also resulted in significant strengthening of the existing system. Essentially, the ECB confirmed its commitment to do what is necessary (the famous “Whatever it takes”) to support economic activity and maintain its asset purchase programme to combat the pandemic (called PEPP) for as long as necessary. It also reduced the rate at which it lends to eurozone banks, dropping it to -1%, which should boost lending to businesses and households as soon as the lockdown measures have been fully lifted. In addition, it is likely that new measures will be announced this coming June to absorb the surplus of bond issues of the eurozone countries resulting from the coronavirus crisis. The analysts expect that the PEPP, which provides for 750 billion euros in bond-buying for 2020, will be increased to approximately 1,250 billion euros.

This reaffirmed and massive support from the ECB has largely eclipsed the stream of bad economic news in the eurozone (especially the collapse of the French GDP in the first quarter) and Europe's inability to agree on a stimulus package.

In this regard, the European Commission must present a draft budget proposal for the 2021–2026 period, which must include a financial mechanism for a coordinated European recovery. According to whispers coming out of Brussels reported recently in the press, it is likely that the package will not be very ambitious and will not include a debt pooling mechanism as claimed by the southern eurozone countries and France. If this is not the case, this would represent another European setback and could increase the political risk for the Old Continent.

Even though the ECB's action was largely welcomed by market players in the immediate term, at a certain stage, Europe's political inability to act and support the member states dealing with increasing debt will ultimately penalise the euro.

From a technical analysis point of view, the rebound of the EUR/USD last week does not really shift the landscape. The pair is still within its long-term range of between 1.07 and 1.12. It is certainly not expected to move out of this range in the immediate future. The bearish trend in the medium term is, however, reaffirmed by the evolution of the euro beneath its 50-day and 200-day moving averages. The support level of 1.0735 is the main marker to watch this week.

Economic calendar

DATE CURRENCY EVENT
4 May EUR

Manufacturing PMI in Germany

5 May EUR

German High Court Decision on the ECB's asset purchase programme (PEPP)

6 May USD

ADP report on changes in private employment in the United States

7 May GBP

Bank of England monetary policy meeting

8 May USD

American jobs report (also called Non Farm Payroll)

 

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