It was another crazy week for the single currency, which ended in the black week on week against its main rivals. The largest gain — around 1.58% — was made against the US dollar, while the month-on-month increase reached as high as 3%.
There are three main factors driving this sharp rise:
- The weakness of the greenback, closely linked to the reduction in bond yield spreads on either side of the Atlantic, and the challenges of managing the health crisis in the US, both of which are jeopardising the prospect of a quick rebound in the American economy.
- The signing of the European stimulus plan agreement, which has given grounds for optimism on a potential upturn in the European economy. The agreement will provide an injection of €390 billion over 6 years, the majority of it from 2022 to 2024, to help the countries worst affected by the crisis, particularly in southern Europe.
- Technical factors, specifically the fact that nearly €2.3 billion in options matured last Wednesday and Thursday alone, buoying the price of the single currency.
A more sustainable rise for the euro
Everything points to a continuation of the euro’s recent dynamism, and even a paradigm shift in the currency market. The dollar seems to have set off on another downward cycle, undermined by the health woes in the US. The Dollar Index, which is a good barometer to go by, has fallen 1.2% over the past week as a result, and nearly 3% since the beginning of this year. In parallel, the euro’s bullish rally is likely to continue. The supporting factors cited above will persist and market positioning is still largely underweight on the euro, paving the way for an increase towards 1.17 or even 1.18 in the longer term. Economic data from the CFTC (Commodity Futures Trading Commission) show institutional investors taking a long (buy) repositioning on the euro, which should help maintain the prevailing trend.
The euro is not just rising against the US dollar, as it continues to climb against the British currency too, with 0.9200-0.9215, the main resistance for this pair, well within its sights. The currency market continues to hold sell positions on the pound sterling when the change in traders’ net speculative positions is taken into account. The failure of negotiations between London and Brussels validates our scenario, whereby we expect to see the pound sterling dragged down in the short term by the uncertainty around the Brexit process, before the likely signature of a last-minute agreement in November/December. The British government is less than optimistic, having revised its ambitions downwards, and is no longer envisaging anything more than a “basic” agreement (which would most likely leave many points unresolved). This is ultimately contingent on Brussels showing greater flexibility.
Meeting of the Fed and negotiations in Congress on the stimulus plan
This week is expected to provide confirmation of recent trends in the currency market. The main event will be the meeting of the US Central Bank this Wednesday. Barring any last-minute surprises, monetary policy is likely to be maintained as is. The minutes of the last meeting showed that the members of the central bank are comfortable with the economic support measures in place and see no need to expand them. Given the financial markets’ strong performance, the Fed will remain in autopilot mode for at least a few months. Still evaluating matters stateside, discussions between the White House and Congress on a new stimulus package will need to be monitored, with a number of support measures for households set to expire by the end of the month. In light of Covid-19’s sustained spread throughout the US, not to mention a renewed lockdown of whole swathes of the economy, there is an urgent need to pull the fiscal lever yet again, in a bid to prevent a lengthy recession.