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Euro Forecast: Key EUR/USD Levels to Watch on Symbolic EU Action

Euro Forecast: Key EUR/USD Levels to Watch on Symbolic EU Action

Justin McQueen, Analyst

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.

EUR/USD (Red line) More Closely Aligned with Bund-BTP Spread (Black line)

Euro Forecast: Key EUR/USD Levels to Watch on Symbolic EU Action

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)

Euro Forecast: Key EUR/USD Levels to Watch on Symbolic EU Action

Source: IG

--- Written by Justin McQueen, Market Analyst

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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