The Euro under direct scrutiny on EU COVID-19 deal – Market Analysis – July 20

By: Miguel A. Rodriguez

09:45, 14 September 2020

All is silent, all is calm ahead of the EU deal finalization

The session focuses on events in Brussels as the EU negotiations on the recovery fund lasted up to the fourth day in a row but finally came close to a compromise.

Comments from leaders such as Merkel, Rutte, or Macron suggest that a minimum agreement has been reached in which the amount of the fund allocated to grants is reduced from EUR500 bln, initially proposed, to EUR390 bln, the rest will be granted in the form of loans. 

At the time of writing this analysis, it is not yet known whether the total amount of the fund remains at the EUR750 bln proposed by the European Commission, or it's been reduced. 

If it were to be reduced, which is unlikely, the amount would be of little importance, at least not to affect the market. 

Negotiations resume at 4:00 p.m. CET, and the final agreement will likely not be known until well into the night.

Market reactions

The market is still waiting for the details, and subdued activity remains with a slight positive risk-sentiment.

Stock indices show modest gains in a market with no clear direction at the moment.

EUR/USD, in the forex market, has reacted with contained optimism to the possibility of a deal and has surpassed the highs of the last four months, reaching the level of 1.1465. 


The pair needs to surpass the technical and psychological level of 1.1500 for its uptrend to gain momentum and head towards the technical level around 1.1600. 

If it is reached today, the approval of the agreement could contribute significantly to this movement, even more, if we take into account the weakness of the Dollar.

In situations like the current one, with less risk aversion, experience outflows are looking for higher returns on assets denominated in other currencies. 

DollarIndex is about to break down a significant support level around 95.74, below which it is paving the way for more significant losses.


The Australian Dollar & Copper

With a declining Dollar and an improvement in market risk sentiment, a pair that would be driven higher would be AUD/USD

The Australian Dollar has recovered virtually the entire drop caused by investors' fear of a blockage in economic activity due to the epidemic. The only factor that could put it in danger would be the escalation of political tensions with China. 

Still, everything indicates that this aspect is not worsening and has passed into the background. In favor of this movement, we find the recovery of commodities with COPPER already above pre-crisis levels and encouraging economic data from China.

AUD/USD finds an intermediate resistance level at 0.7060, above which the targets of a bullish movement would be at 0.7200, 0.7290, and 0.7380.


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