The EUR has lifted on EU recovery fund news, with the European Commission reportedly outlining a compromise proposal that aims to satisfy both the German-Franco position and the so-called “frugal four” (Austria, Sweden, Denmark and the Netherlands).
The EU looks to be moving closer to finalizing massive recovery funds, along with hopes for extra ECB stimulus. According to a Bloomberg report citing a “person familiar with the matter”, the EU is to propose a EUR 750 bln stimulus package. The package will partly be funded via joint debt issuance and include EUR 500 bln to be distributed as grants, with an additional EUR 250 bln available for loans. Not so much a compromise as a combination of the French-German proposal and the proposal of the “frugal four” (Austria, the Netherlands, Sweden and Denmark). Italy has been the hardest hit by Covid-19 and if it gets a sizeable grant to cover part of the recovery costs, it will mean reduced pressure on already strained public finances and also make the ECB’s task much easier.
European stock markets and Eurozone peripheral bonds got a boost from the Bloomberg report, but also on the hopes of additional ECB stimulus after choes comments from ECB President Lagarde earlier today and ECB’s Guindos, who sees the economy shrinking 8-12% this year.
Dovish comments from ECB’s Lagarde, who highlighted the impact of the pandemic on the economy, and Executive Board member Schnabel, who reported that the central bank is ready to expand the PEPP program in size and/or duration added to stimulus hopes and GER30 and UK100 are up 1.7% and 1.5% respectively, after a mixed close in Asia, where a flaring up of protests in Hong Kong and concern over US-China tensions limited risk appetite.
ECB’s Lagarde said that she no longer believes in “mild” slowdown, with the central bank president saying that the economic hit from the virus will likely be between the central bank’s medium and severe scenarios. Lagarde added that the economy will shrink more than during the global financial crisis, with some countries more affected than others.
The comments effectively lay the ground for additional ECB action, with the central bank likely to expand the PEPP program either in June or July.
In the FX market, the Dollar dropped back as risk appetite picked up on news that Japan and the EU are moving closer to finalizing massive recovery funds, losing some of its safe haven premium, in turn giving EURUSD a further underpinning.
EURUSD has rallied and broken above 1.1000, posting a high so far at 1.1030, which is the loftiest level seen since April 1st. A low was left at 1.0935. The EUR is up against other currencies, too, showing respective 0.3% and 0.5% advances versus the Pound and Yen, for instance. EURUSD continues to trade in a broad consolidation range near the halfway mark of the volatile range that was seen during the height of the global market panic in March, which was marked by 1.0637 on the downside and 1.1494 on the upside. Despite the fresh highs today, the pair continues to lack sustained directional bias in the medium and long term picture. There is little divergence in central bank policy currently, with both the ECB and the Fed pursuing aggressively accommodative policy, with both Europe and the US facing significant economic headwinds from virus-containing lockdown measures. Both are amid the early stages of reopening from lockdowns.
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Andria Pichidi
Market Analyst
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