The beginning of June was a real benefit for Christine Lagarde and the single European currency. The ECB expanded its emergency asset purchase program due to the pandemic by €600 billion, announced that it will continue until at least June 2021, revenues are planned to be reinvested until the end of 2022, and the Frenchwoman in the best traditions of Mario Draghi said that the decision to increase the scale of QE was made unanimously. However, the former head of the Central Bank did this in order to sink the euro, and its current head – in order to support Italian bonds. Spreads on their rates with their German counterparts went down, and EUR/USD quotes soared to 3-month highs.
For some, it may seem strange that monetary expansion leads to a strengthening of the regional currency, however, you need to understand that the reaction of Forex to certain events differs at different stages of the economic cycle. In times of recession, investors are obsessed with the scale of incentives that can smooth a downturn. According to an unspoken rule, the share of support in % of GDP should correspond to the size of the economy’s losses. The EU has done more. Thanks to the issuance of bonds by the European Commission for €750 billion and an additional budget of €1.1 trillion, as well as earlier aid programs, the fiscal stimulus is estimated at 13% of the Eurozone’s GDP. At the same time, the ECB predicts that its economy will sink by 12.6% even in the worst-case scenario associated with the second wave of COVID-19. The basic option assumes a loss of 8.7%.
The fiscal stimulus for EU countries
Thus, the generosity of the ECB and the EU led to the strengthening of the euro. However, the EUR/USD rally was associated with the confidence of investors in the implementation of the Franco-German fiscal stimulus project. It seemed that it was implemented de facto, although it was not even de jure yet. The program must be approved at the EU summit on June 11-12. If it is adjusted, the position of the “bulls” in the single European currency will be dealt a serious blow. However, the European Commission tried to make sure that both the wolves in the face of the Netherlands, Austria, Denmark, and Sweden were fed, and the sheep (southern EU countries) were whole, so the chances of failure are small.
Along with fiscal and monetary stimulus, the longest daily rally of EUR/USD since 2011 was facilitated by the sale of the US dollar. Investors against the backdrop of the global economic recovery and the growth of global risk appetite no longer need safe-haven assets in the same volume, and the Fed’s balance sheet is growing so fast that it is time to think who can now be weaker than the “American”. At the June meeting, the FOMC is able to suspend the process of falling the USD index, making a hint to use the practice of targeting the yield curve. In addition, data on the US labor market for May showed that the recession may not be as bad as previously thought. Is it too early to get rid of the dollar?
Technically, the target of 88.6% for the “Bat” pattern has been reached, so I recommend closing the EUR/USD longs formed from the level of 1.099. In the future, pullbacks in the direction of 1.124 and 1.12 should be used before buying.
EUR/USD, the daily chart
Source: The euro has cornered the enemy