Europe and EUR update

Sentiment collapsed further in the European session on the news that EU finance ministers failed to reach a deal and also on the announcement from German institutes, in which they estimated a nearly 10% contraction in Q2, the sharpest decline since records began in 1970. This topped the concerns of the pandemic and related shutdown of the economy.

EU leaders will meet again tomorrow. Discussions on how to finance a European wide response package to the pandemic have not yet found a compromise. Demands for Eurobonds are clashing with the red lines against mutualising debt in countries such as Germany, which would make the introduction of new financing measures a lengthy affair even if officials were to agree to such a step. The southern European states (especially Italy) are keen to have debt mutualisation (“coronabonds”) as part of the package. The most likely outcome is a use of ESM funds to finance immediate aid measures, coupled with funds from the EU budget and the EIB investment bank to finance economic measures not just through the immediate crisis, but to kick start the recovery once lock downs have been lifted.

Last but not least for the European economy, is the fact that the ECB lowered collateral standards, to keep credit flowing. The central bank announced that it will temporarily lower standards for the collateral that banks can use to access ECB funds. The move is aimed at keeping credit flowing through the crisis and will also allow Greek debt to be used. Furthermore the haircut applied to collateral, which will allow banks to borrow more money against the same amount of collateral. As a result the ECB will take on more risk onto its own balance sheet, but the hope is that by strengthening banks’ access to funds the central bank can boost lending to households and businesses. For Greece it will also give the government more room to finance its measures to get the economy through the pandemic. The central bank stressed that the “measures are temporary for the duration of the pandemic crisis” and will be reassessed later in the year.

Hence as risk-on has turned into risk-off, the EUR has weakened so far today on USD strength. It will be very important for the long term stability of the bloc that there is a clear signal of solidarity at tomorrow’s juncture.

EURUSD concurrently declined by almost 0.5% in making a low at 1.0829, resuming the bearish outlook in the daily picture for the asset. Yesterday’s rally spread concerns over the EURUSD possible trend reversal, however today’s swing lower again along with the decline for 7th consecutive day below 20- and 50-day SMA suggest that yesterday’s rally was just a correction.

In the 1-hour chart, EURUSD has been moving within a tight downchannel since the 1.0925 peak, with lower ups and downs seen since then. Hence in the near term any recovery within the channel could be interpreted as a correction prior to a pullback. Intraday momentum indicators are mixed with RSI at neutral zone posting lower lows since yesterday, while MACD lines have been zeroed suggesting that bulls have lost the control today. Additionally, the mark of a hummingbird by Bollinger bands pattern, which indicates a bearish signal in the daily chart, could signal further weakness in the near term.

In order for the near term picture to turn to positive again, the hourly RSI needs to sustain a move above 50, while we need to see a swing outside the channel and above the confluence of the latest up fractal and the 20-hour EMA, at 1.0892. Meanwhile, in the medium term outlook, the asset is facing a strong Resistance area at 1.0950-1.0965 (50% Fib. retracement from 1.1146 downleg and 50-day SMA). A decisive breakout above this area could to imply to the continuation of a recovery for the asset.

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Andria Pichidi

Market Analyst

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