Euro-to-Dollar Week Ahead: In Recovery Mode and Headed for Party at the European Central Bank

- EUR/USD crosses Rubicon, poises for more gains into June ECB meeting.
- After breaking range and overcoming 200-day, 55-week moving-averages.
- Unrest in U.S., recovery fund celebrations offer tailwind to a buoyant EUR.
- Increase in ECB QE programme could squash 'periphery' yields, aid EUR.

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• EUR/USD spot at time of writing: 1.1087
• Bank transfer rates (indicative): 1.0702-1.0784
• FX specialist rates (indicative): 1.0942-1.0988 >> More information

The Euro-to-Dollar rate crossed a Rubicon last week and in the process set itself up for further gains that could be aided this week by unrest in the U.S., an upbeat mood in global markets and a likely European Central Bank (ECB) supplement to its support for the Eurozone economy. 

Europe's single currency rose against the Dollar for five days on the bounce last week and in the process, overcame resistance at 1.10 as well as its 200-day moving average of prices before also closing above its 55-week moving-average at 1.1064 in a move that was aided by a collection of voices that threw in the towel on bearish wagers and forecasts for the single currency. 

The 1.10 level and 200-day average at 1.10 had blocked the Euro's path higher through April and May while with March volatility aside, the single currency had not traded above the 55-week average since early 2018 and the outbreak of the U.S.-China trade war. Overcoming those levels has now set the Euro-to-Dollar rate up for further gains over the coming days and weeks, which could be supplemented by both domestic as well as international developments. 

"EUR/USD has at long last taken out the 200 day ma and its current May high at 1.1012/19 with gusto. The close above here should be enough to regenerate upside interest to the 1.1240 December peak and beyond," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who's been betting on lift-off having bought the Euro at 1.09 and who also tips 1.1332 as a short-term possibility. "We have a confirmed buy signal on the DMI Index and now look for a move higher."

The Euro enters the week around 1.1087 and with follow-through excitement over last week's European Commission recovery fund proposals aside, it could draw immediate support from scenes of unrest in the U.S. where protests over the conduct of Minneapolis law enforcement have spread to major cities but been hijacked by looters. The United States National Guard has been deployed. 

"Given the rangey nature of the major currencies in the past few weeks, this may be a make or break moment for the USD generally," says Juan Manuel Herrera, a strategist at Scotiabank. "The common currency looks likely to grind slightly higher before it faces resistance around the 1.1150 mark followed by its late-March peak of 1.1163, while support stands at 1.1080/100."

Above: Euro-to-Dollar rate shown at daily intervals.

The Dollar was already on the back foot to begin with last week after investors overlooked rising tensions between the U.S. and China while continuing to chase the recovery in stock markets, and could remain so this week after President Donald Trump's response to China's actions in Hong Kong was perceived to be on the milder side of expectations, which lifted stock markets into the weekend close. 

But it could be penalised early this week for the ugle scenes playing out in major cities as they distract from the coronavirus and are a solely domestic issue. Meanwhile, the Euro is seen remaining on its front foot for reasons that go beyond the technical. The European Central Bank (ECB) is expected to announce a large increase in its coronavirus-related bond buying programme this week, which might not be nearly as bearish a development for the Euro as it would be in ordinary times.

"Good for European risk should be good for the EUR in the current environment," says Chris Turner, head of markets and regional head of research at ING. "Because of the uncertain risk environment, we probably have greater confidence in EUR out-performance against the commodity bloc (e.g. EUR/AUD to 1.70) than the dollar per se and we will also be watching whether USD/CNH topside risk is contained near 7.20." 

There is a negative correlation between the Euro and 'periphery' economy bond yields that would fall upon any announcement of further ECB buying in large volumes, more so if the bank surprises on the upside of expectations. Periphery yields have been a key focus since the coronavirus did its worst to some of Europe's most overindebted, financially fragile and vulnerable economies and the Euro tends to move in the opposite direction to them.  

Analysts look for between a €500bn and €750bn increase this week that would almost double the size of the existing pandemic-emergency-purchase-programme and soak up some of the increased supply that's expected to hit the market as a result of the coronavirus. 

The decision is out at 12:45 Thursday and followed by a press conference at 13:30 and could help to sustain appetite for the Euro, which has returned in earnest since last week's European Commission proposals to raise €750bn from markets (the ECB) to aid virus hit EU economies.

Above: Euro-to-Dollar rate with Italian 2-year bond yield (black line) and Italy-Germany yield spread (orange).

"Get ready to be run over by the Eurocrat bulldozer! Politicians and central bankers in the Euro area now uniformly want to atomize everyone betting or working against the common currency. Position yourself accordingly. We go long EUR/USD," says Andreas Steno Larsen, a strategist at Nordea Markets. "The big question is now if Christine Lagarde’s plays her cards right at the ECB presser next week. On one hand, the sudden Franco-German debt unity may have increased ECBs confidence in “being allowed” to give a middle finger to the Karlsruhe ruling. On the other hand, Lagarde may be tempted to keep up the pressure on politicians to get the debt deal done before the ECB ramps up asset purchases once more. We lean towards the former and bet on a substantial PEPP increase on Thursday (500bn or more)."

Proposals would see grants and loans doled out from January 2021 and come after an absence of collective action that threatened the Eurozone recovery and quickly stoked anti-EU sentiments in some parts of the bloc. The cost of clearing up after the pneumonia-inducing disease runs into the double-digits of GDP and is so large that some members will have, and could yet be, constrained in their ability to foot it without collective action. 

However, porposals alone are not enough. They must also be unanimously endorsed by the EU 27 and a number of its members have already objected to them while more could do so before they're discussed in the June 18-19 European Council meeting. German Chancellor Angela Merkel said last week she doesn't expect an agreement to emerge from this summit although more important for the Euro might be the exact level of opposition that does emerge. 

The proposals are controversial for some members and will have to be endorsed unanimously alongside the always-controversial EU budget that's not grown any less incendiary since it was last discussed in February. The starting point is one of even more disagreement over a greater number of thornier issues, which leaves room for fresh acrimony that could take some of the shin off the Euro in June. That's assuming U.S.-China tensions don't do this first.

"The Frugal Four" is much less potent without the UK, which leaves a fair chance that France and Germany will literally run over the opposition, but markets remain surprisingly unconvinced of an ultimate breakthrough for the current debt deal (at least according to our small survey). Maybe that is also the exact reason why the EUR so far has failed to truly celebrate," Larsen says. "What is the scope for EUR-strength in case the debt deal goes through? The tail is probably heavy on the high side for the EUR/USD (>1.20) outcome space but compared to e.g. SEK, NOK and AUD, it could be argued that the EUR needs to catch up a bit just to reflect the post “peak corona fear” world. Low delta zero-cost riskies remain our favorite weapon of choice when betting on EUR strength. We go long EUR/USD with a target of 1.1670.." 

Above: Euro-to-Dollar rate shown at weekly intervals with 55 and 200-week moving-averages.

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