EUR/USD Price Analysis & News
- EU Takes Symbolic Action, Beware of Frugal Four
- Peripheral Debt Among the Key Beneficiaries
- The Frugal Four May Temper Upside
- Euro May Shift into a Higher Range
EU Takes Symbolic Action, Beware of Frugal Four
Yesterday, the European Commission proposed an ambitious recovery fund, containing the key parts of the Franco-German aid package with grants at EUR 500bln and loans at EUR 250bln. While the proposal is likely to enter tough negotiations to be approved, this however marks a clear step in boosting European integration and this is a positive for the Euro.
Peripheral Debt Among the Key Beneficiaries
| Country | Grant Allocation (EUR) |
|---|---|
| Italy | 81.8bln |
| Spain | 77.3bln |
| France | 38.8bln |
| Poland | 37.7bln |
| Germany | 28.8bln |
| Greece | 22.5bln |
| Portugal | 15.5bln |
Source: European Commission
In light of the announcement of the grant allocation, peripheral bonds had outperformed with the Bund-BTP spread tightening below 200bps, which in turn signals reduced sovereign risk and thus provides support to the Euro. In recent weeks we have noticed an increased alignment between EUR/USD and the Bund-BTP spread. Therefore, further tightening in bond spreads should keep the Euro supported.
| Change in | Longs | Shorts | OI |
| Daily | -5% | 4% | -2% |
| Weekly | -4% | -9% | -6% |
EUR/USD (Red line) More Closely Aligned with Bund-BTP Spread (Black line)
Source: Refinitiv. Bund-BTP Spread (RHS, Inverted)
The Frugal Four May Temper Upside
It is important to keep in mind that while a joint EU recovery package is symbolic it is merely a proposal and thus is likely to prompt tough negotiations before an agreement among the 27 national EU governments is reached. As it stands, the frugal four have already poured cold water on the ambitious plan, which in turn raises the likelihood that upside in the Euro could be shallow and keep the Euro within a range.
Euro May Shift into a Higher Range (Daily Time Frame)
Source: IG
--- Written by Justin McQueen, Market Analyst
Follow Justin on Twitter @JMcQueenFX
