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Currency Market Analysis

Jul 17, 2020 | Currency Market Analysis

Global Themes

  • EU summit takes centre stage
  • How might currency markets react to EU?
  • Signs of V-shaped recovery


EU summit takes centre stage

The Euro remains a shade firmer this morning ahead of what is a crucial 2-day EU summit, which concludes tomorrow. The 27 EU leaders seek to overcome their divergences over a support programme of €750bn, consisting of two-thirds grants and one third of loans. Investors are belting up for a potentially volatile period in the markets as a result.

The key focus of the meeting will be on the tone and progress made, due to the divisions that have stifled quick decisions being made in the past. The so-called “frugal four” – Sweden, Denmark, the Netherlands, and Austria have so far opposed the recovery fund, which aims mainly to help rebuild the southern economies most affected by the pandemic. With immediate relief measures such as job protection schemes tapering out this summer, the EU hopes to prevent a deep economic downturn throughout autumn.

  • A unanimous agreement has to be made over the next two days, otherwise another extraordinary summit will likely be called. After months of quarrels over medicine, medical equipment, border closures and funds to help tackle the crisis, all eyes are on whether the EU nations can unite.

How might currency markets react to EU?

The Euro is expected to soar higher if an agreement on the EU rescue fund is reached, as it aims to help kick-start economic growth that has been suppressed by the pandemic. EUR/USD is the most traded currency pair in the world so any major moves could drive other EUR- or USD-denominated currency pairs too.

An agreement could see EUR/USD leapfrog the $1.14 handle once again and charge towards $1.15. A close above this key level may open the door to a new trading range with $1.18 a topside target. In this case, GBP/EUR will likely be dragged under €1.10 and a close below €1.0970, where an upward sloping trendline supports, could expose a drop to €1.09 and €1.08 thereafter in the short-term. However, with major flows into the common currency, the US Dollar is thus likely to depreciate and therefore GBP/USD may scale higher. GBP/USD remains confined within an short-term uptrend chancel with the $1.24-$1.25 base supporting, and the $1.27 acting as a target/stiff resistance to the topside, which if broken, could quickly see the $1.28-$1.29 range come into play.

  • On the flipside, should EU divisions dominate, then the Euro is expected to depreciate. EUR/USD may retrace towards $1.12 and this could drag on GBP/USD to the lower bounds of the aforementioned range, whilst GBP/EUR could climb beyond €1.11 and towards €1.12.

Signs of V-shaped recovery

The safe-haven US Dollar fell modestly yesterday afternoon after US retail sales data for June came in better than expected. After rising 18.2% in May, retail sales rallied for a second month straight, up 7.5% in June. This bolstered risk appetite, thus actually weakening the US Dollar.

Although sales haven’t returned to pre-crisis trends, the recent upturn has some optimists renewing hopes of a V-shaped recovery, which would further boost market sentiment. However, after a record 70,000 new daily Covid-19 cases were logged in the US yesterday, the risk of reinstated lockdown measures threatens to derail the current economic rebound. Furthermore, even if a second outbreak and subsequent lockdowns are avoided, retail sales are unlikely to continue rising at such a pace given the millions of people still out of work.

  • With this in mind, yesterday’s positive mood was tainted by another devastating weekly jobless claims report. Claims remain roughly double their highest point during the 2007-09 Great Recession. The trade-weighted US Dollar index thus snapped a 4-day losing streak in the end yesterday.

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