Euro Forecast: EUR/USD Outlook Lifted Long-Term by Recovery Fund Plan
Fundamental Euro Forecast: Bullish
- The long-term outlook for the Euro has been given a substantial lift by news that France and Germany are proposing a €500 billion Recovery Fund to mitigate the impact of the coronavirus pandemic on the Eurozone economy.
- While agreement could take weeks, the proposal suggests that the region is more able than sceptics feared to take joint decisions when necessary.
Euro price outlook brightens
The past week was a highly significant one for the Euro, with sentiment lifted by a joint Franco-German plan for a €500 billion Recovery Fund to help the Eurozone economy recover from the impact of the coronavirus pandemic.
An agreement is not close and is more likely in the second half of the year – if at all – than in the first. However, it has already had a positive psychological impact on the Euro and helped allay concerns that the European Union structure is too complicated and cumbersome for decisions to be taken.
There has been “a real change in philosophy,” French President Emmanuel Macron said. “I believe this is a very deep transformation and that’s what the European Union and the single market needed to remain coherent. It’s what the Eurozone needs to remain united.”
While the sceptics might dismiss that as hyperbole, the plan helped EUR/USD break to the upside from a triangle pattern on the daily chart towards the psychologically-important 1.10 level.
EUR/USD Price Chart, Daily Timeframe (February 21 – May 21, 2020)
Chart by IG (You can click on it for a larger image)
In truth, divisions between the economically conservative north of the EU – countries like Austria, Finland and the Netherlands – and the less frugal south, including Italy and Spain, remain as wide as ever. However, France and Germany, the two largest EU countries, usually have their way and are likely to this time.
The next important date is May 27, when the European Commission is expected to announce its own proposal. That will certainly differ from the Franco-German plan, likely proposing loans to the areas worst hit rather than the grants suggested by Paris and Berlin. These issues will then likely be discussed by EU finance ministers and then the EU heads of state and government meeting on June 18-19. Any agreement therefore seems unlikely before the second half of 2020.
Nonetheless, France and Germany have helped dispel some of the doubts about the ability of the EU nations to take action in response to the spread of Covid-19 and taken some of the pressure off the European Central Bank to do all the heavy lifting.
Week ahead: Ifo index, confidence and inflation
Turning to the week ahead, the next few days are packed with confidence indicators, starting with the Ifo business climate index for Germany on Monday. Several consumer confidence and business confidence figures follow before German inflation data are released Thursday followed by Eurozone price statistics Friday. Note, though, that the markets’ attention remains fixed on coronavirus development, making economic data less important than usual.
--- Written by Martin Essex, Analyst and Editor
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